Until recent years, the majority of individuals did not have access to equity from businesses – only the very wealthy were so privileged. However, in April 2012, the passing of the Jumpstart Our Business Startups Act (JOBS Act) changed all of this. The new law enables individuals to participate in the equity crowdfunding (or crowd-investing) revolution.
This type of crowdfunding is similar in nature to crowdfunding that is rewards based, except that investors obtain equity from the companies in which they invest rather than gain early access to a free product. Equity crowdfunding platforms are generating billions of dollars for startup funding each year.
The Jumpstart Our Business Startups Act Requirements
The SEC rules state that securities sold through crowdfunding sites must be retained for a minimum of one year unless they are sold to a family member, an accredited investor, or the securities are included as part of an SEC registered offering. Accredited investors are defined as individuals making more than $200,000 per year ($300,000 per year with a spouse) for the previous two years and who expect the same level of income in the current year, or who have a net worth of more than $1 million (not including the value of the primary residence) with or without a spouse. Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer. Lacking these qualifications, the investor is not considered an accredited investor.
If, during a 12 month period, your annual income or net worth is below $107,000, you may invest either $2200 or 5 percent of your net worth or income, whichever value is the lowest. If your income and net worth or both greater than $107,000, you may invest as much as 10 percent of your net worth or income, whichever is lower. The maximum investment amount is $107,000.
Crowdfunding Companies and Applicable Regulations
According to the Jumpstart Our Business Startups Act, crowdfunding companies can permit startups to raise $1,070,000 over the course of a year. In addition, issuers are required to provide the following information to investors for investment evaluation purposes:
• Business description and the intended use of the funds
• Information about company officers, directors, and any individuals who own 20 percent or more of the company
• The price of the securities and how they are priced
• The deadline to acquire the target amount of capital
• A discussion of the potential risks involved with investing in the company
The JOBS Act of 2012 was implemented in order to jumpstart the economy by enabling individuals outside of the wealthy class to invest in small businesses and startups that are responsible for the greatest percentage of job creation in the U.S.
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