The Securities and Exchange Commission voted to implement Title III of the Jumpstart Our Business Startups (JOBS) Act on Friday.
Translation? It’s now legal for any American to invest in startups and small businesses.
Unlike Kickstarter or GoFundMe, which allow you to invest in a product or idea and then in return get a token gift, equity crowdfunding actually allows you to own a stake of the business. This could mean potential profits if the business succeeds or goes public. It could also result in steep losses for those that have invested.
Until now, you had to be an “accredited investor” to have equity in a private company. So in a nut shell the two ways to qualify — and either way you have to be pretty wealthy. Generally your income has to be at least $200,000 (or a combined $300,000 for married couples) in each of the prior two years. Second, all eligible investors must have a net worth of over $1 million, either alone or together with a spouse (excluding the value of his or her primary residence).
Limiting risk for investors
The SEC has now implemented caps for investors depending on income. If your income is $100,000 or less, you’re allowed to invest up to 5% of your income. Those earning more than $100,000 can invest up to $10,000.
It will take 90 days for Title III to be implemented, so starting in January anyone will be able to invest in their favorite pizza joint or new app (but only if the company is seeking funding)