Crowdfund Investing For Dummies
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For many decades, U.S. investors have been divided into two categories: accredited and unaccredited. These designations are the same in crowdfund investing. Federal law indicates that accredited investors meet at least one of two criteria:

  • They have a net worth of more than $1 million (excluding their primary residence equity) either independently or with a spouse.

  • They’ve earned more than $200,000 per year for the two most recent years or $300,000 per year with a spouse for the two most recent years.

Everyone else is considered unaccredited. Accredited investors can do whatever they want with their money and aren’t restricted in their investment choices. Prior to the passage of the JOBS Act, entrepreneurs wanting to raise capital (and meeting certain criteria with the Securities and Exchange Commission) could do so by seeking investments from as many accredited investors as they wanted but from only (in most cases) up to 35 unaccredited investors.

To provide some context, according to 2009 Internal Revenue Service data, fewer than 3 percent of the 140 million tax returns filed reflected annual income of more than $200,000.

Based on that data, you can broadly estimate that prior to the passage of the JOBS Act, as many as 97 percent of Americans were considered unaccredited investors based on the income criteria. (Some of the people in that 97 percent may have qualified as accredited investors per the net worth criteria.)

And anyone considered an unaccredited investor had a fairly slim chance of getting involved in the funding of startups and small businesses. (With only 35 unaccredited investors allowed for most startups, the opportunities for widespread private equity investment just didn’t exist.)

The JOBS Act changed the whole picture. Now, potential investors don’t need to meet a minimum income or net worth threshold in order to invest in startups and small businesses. In other words, you can be an unaccredited investor and still have the opportunity to purchase private equity or debt.

Someone making $25,000 could choose to invest $50 or $500 in a campaign she believes in. If you project this scenario out to the tens of millions of Americans who couldn’t participate in private equity before, you can imagine the potential impact of crowdfund investing.

Money flowing into startups and small businesses will create demand for products and services that support these businesses (from copy paper to accounting software to automobiles), thereby creating the demand for jobs and stimulating the economy. This is a win-win-win, folks!

About This Article

This article is from the book:

About the book authors:

Sherwood Neiss, Jason W. Best, and Zak Cassady-Dorion are the founders of Startup Exemption (developers of the crowdfund investing framework used in the 2012 JOBS Act). They deeply understand the process, rules, disclosures, and risks of capital formation from both the entrepreneur's and the investor's points of view.

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