Soon, investing in startups will be an opportunity, and a risk, available to nonaccredited investors. On Friday, the Securities and Exchange Commission (SEC) adopted rules for how securities could be sold to small-time investors, finally implementing Title III of the Jumpstart Our Business Startups (JOBS) Act.
Restrictions on the sale and marketing of securities to the general public were instituted in the Securities Act of 1933 in the wake of the discovery of widespread fraud on Wall Street after the crash of 1929. Since then, the expansion rights of unaccredited investors have been enlarged on a state by state basis, and was set for a nationwide comeback by the JOBS Act in 2012.
Nonaccredited investors are defined by the SEC as those who don’t make $200,000 a year or have a net worth less than $1 million.
Under the new rules, companies are able to crowdfund $1 million from unaccredited investors on an annual basis, and the SEC is debating whether to lift that cap to $5 million.
The primary form of protection afforded to investors are strict limits on how much equity they can purchase: those making less than $100,000 can invest up to $2,000 or 5 percent of their income in crowdfunding ventures, whichever is more; if both their income and net worth are above $100,000, they can invest up to 10 percent of the greater number.
The company offering the securities is required to make basic disclosures such as the fundraising target, description of the business, and shareholders who own more than 20 percent of the company.
