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New rules allow anyone to invest up to $2,000 a year in startups

New rules allow anyone to invest up to $2,000 a year in startups


The SEC has finally opened up crowdfunding to the masses

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Way back in 2012, Barack Obama signed the JOBS Act into law. Part of the legislation was aimed at making it easier for average people to invest in startups, potentially reaping the rewards on the next Facebook, upside which until now has been limited to wealthy investors and venture capitalists. The ordinary citizens who backed the Oculus Rift on Kickstarter, for example, might have found themselves better rewarded if they were actual investors, not just fans making a pledge.

It took the Securities and Exchange Commission four years to iron out the details of exactly how those investments should work. The SEC was understandably concerned about the potential for Ponzi schemes and snake oil salesman. Today the new rules finally went into effect, with two important caveats. Unaccredited investors — people who make less than $200,000 a year — can't invest more than $2,000 a year in small companies. And those investments must be made through a funding portal approved by the SEC, with the expectation that these middlemen will help to ensure quality control.

Most companies are not the next Facebook

For companies that have turned to crowdfunding on platforms like Kickstarter and Indiegogo in the past, the new rules offer another option, one with benefits and drawbacks. Unlike most campaigns on those platforms, they won't have to promise delivery of goods on a specific timeline, a challenge that has led to a number of high-profile flameouts. On the other hand, stakeholders granted financial equity in a company may have more influence on the company's future decisions than backers who simply pledge their cash.

It's also worth remembering that venture capital, the main engine of investment in startups, operates on the principle that about nine out of 10 companies will fail to deliver a positive return on capital. VCs count on one or two big hits to turn a profit. VCs also typically invest only when they have guarantees, allowing them to invest in future funding rounds if the company is doing well. This helps them to hedge their downside by doubling down on the companies that work. Investors who join a funding round with $2,000 or less are unlikely to be given the same privileges.