Crowdfunding: What it Means for Investors
by Bill Clark on Mashable
Bill Clark is the CEO of Microventures, a securities broker/dealer that uses a process similar to crowdfunding which allows backers to invest $1,000 to $30,000 in startups online. You can follow him on Twitter @microventures. The crowdfunding feature in the recently passed JOBS Act will not only impact startups, it will affect investors, too. That’s because the law allows almost anyone to invest in a startup. There is one catch, however.
In the amended bill, the Senate gave the U.S. Securities and Exchange Commission 270 days to interpret and issue the rules for the public. That means potential investors may have to wait until 2013 before it’s legal to make an investment. In the meantime, there are a few things they should consider.
In about 90 days the Access to Capital for Jobs Creators Act should go into effect, allowing companies to tell the public that they are raising capital. In the past, this type of solicitation was illegal and could exempt the company from raising money privately. Now, startups should be able to solicit their deal, which could mean that more investors will be able to hear about it.
The caveat is that only accredited investors can participate in those deals where the company is soliciting. In other words, this will only apply to investors who fall into the following categories.
Your net worth is more than $1 million, excluding your home
You have $200,000 in new income for the last two years and a reasonable expectation to make $200,000 in the current year
You have $300,000 in household income for the last two years and a reasonable expectation to make $300,000 in the current year
If you do not fall into those brackets, then you have two options. First, you can look at campaigns on Kickstarter or Indiegogo. While you can’t make an actual investment in a company, you will get something for your contribution. For example, if you invest in a video game you might get a copy of the game. Looking through the projects and treating them like investments is a good way to start learning how to filter the good from the bad.
Second, you can also sign up at Angellist. Check out company descriptions and see if there are any startups that you might be interested in. If you find one, you can contact the founders and see if they are raising capital. You may have to invest the more traditional angel level amount of $25,000 to $50,000, but that will vary by deal.
If you choose to wait until 2013, then as a new investor you will need to fill out a suitability questionnaire which will ensure that you understand the risks associated with investing. There are some restrictions on how much you can invest in a given year. This measure will help protect investors from putting too much of their money into potentially risky companies.
Forr example, if you make $75,000 per year, you can invest $3,750. If you make more than $100,000 annually, then you can invest 10% of your income or net worth, with a maximum total investment of $100,000 per year. If you make $250,000, then you will be able to invest up to $25,000 in startups in a given year.
Once you know how much you can invest, make sure you do your homework on the company you select. Conduct your due diligence by talking to the founders, reviewing a business plan or pitch deck, researching the competition and the market size, and looking at what the company intends to do with the funds.
Doubling its previous estimate of a $2.9 billion loss for the fiscal 2011, Sony now forecasts a record $6.4 billion loss.
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