Crowdfunding for Non-Accredited Investors

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Crowdfunding for Non-Accredited Investors

As of May 16, 2016, websites that facilitate crowdfunding are no longer restricted to just those individuals who have accredited investor status. This means that average individuals, in theory, would be able to join in start-up businesses, while in the past, such opportunities were only open to angel investors and venture capitalists. There are, of course, certain limitations, and early stage businesses have a much higher level of risk, along with the possibility of greater profit.

Key Takeaways

  • It is important for non-accredited investors to keep in mind that, despite the fact that Title III allows for universal participation, many crowdfunding platforms are unlikely to participate in the program. Because of this, the kinds of investments in which you are able to take part may be limited. Take into account the fees that are charged by each platform while you are thinking about alternative ways to invest your money. These fees may have an effect on the outcomes you get over the long run.
  • It is important for non-accredited investors to keep in mind that, despite the fact that Title III allows for universal participation, many crowdfunding platforms are unlikely to participate in the program. Because of this, the kinds of investments in which you are able to take part may be limited. Take into account the fees that are charged by each platform while you are thinking about alternative ways to invest your money. These fees may have an effect on the outcomes you get over the long run.
  • It is important for non-accredited investors to keep in mind that, despite the fact that Title III allows for universal participation, many crowdfunding platforms are unlikely to participate in the program. Because of this, the kinds of investments in which you are able to take part may be limited. Take into account the fees that are charged by each platform while you are thinking about alternative ways to invest your money. These fees may have an effect on the outcomes you get over the long run.
  • It is important for non-accredited investors to keep in mind that, despite the fact that Title III allows for universal participation, many crowdfunding platforms are unlikely to participate in the program. Because of this, the kinds of investments in which you are able to take part may be limited. Take into account the fees that are charged by each platform while you are thinking about alternative ways to invest your money. These fees may have an effect on the outcomes you get over the long run.

Equity Crowdfunding and the JOBS Act

This is the history of the situation: By making it easier for small businesses to get financing, the Jumpstart Our Business Startups Act (JOBS) of 2012 was adopted in 2012. This made it possible to stimulate economic growth via the creation of new jobs. The concept of crowdsourcing is specifically addressed in Title III of the bill. 1 In October 2015, the United States Securities and Exchange Commission (SEC) implemented several basic standards that make it possible for non-accredited investors to participate in this kind of investing. 2

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There are many different equity investments, but only approved investors may purchase them. Banks, insurance companies, employee benefit plans and trusts, together with some individuals who are considered wealthy and financially savvy enough to have a diminished need for certain precautions, are some of the entities and individuals who are covered. To be considered an accredited investor, a person must either have an annual income that is more than $200,000, have a net worth that is greater than $1 million, or be a general partner, executive officer, or director of the company that is issuing the securities. 3

Investing via crowdfunding platforms is uncharted territory for non-accredited investors; however, if non-accredited investors are aware of how the various types of crowdfunded investments operate, they may be equipped with the knowledge and tools necessary to make decisions that are more well-informed.

Equity Crowdfunding

The kind of crowdsourcing known as equity crowdfunding is the kind of crowdsourcing that is primarily addressed under Title III of the JOBS Act. This kind of financing involves a number of investors contributing money to a single company in exchange for equity shares in that company. In the early stages of a company’s development, it is common practice to obtain seed capital via the use of crowdsourcing.

There are many different reasons why non-accredited investors can find investing in stock to be intriguing. To begin, there is the opportunity for a satisfactory rate of return in the event that the business in which you have invested becomes public. You will be able to sell your stock shares when the company becomes public, at which point you will not only be able to repay your initial investment but also any profits you may have made.

If you are fortunate enough to make an investment in a company that goes on to become the next Google, the return on your money might be enormous. It is important to keep in mind, however, that the likelihood of these events happening is low, but not nonexistent; this is one of the reasons why the atmosphere of a beginning business is exciting and attracts individuals.

Aside from that, there is no need for a significant amount of capital to get started with equity crowdfunding. You could be able to invest as little as $1,000 in a company, depending on the size of the investment round that the company is looking for. The playing field will now be more or less the same for accredited and non-accredited investors thanks to this change.

The inherent danger and the timeline involved in stock investing are two of the most major factors that work against investors. There is no guarantee that a new business will be successful, and in the event that the company is not successful, your your shares will be worthless. If the company continues to do well, it might be several years before you are able to sell your shares. The statistics provided by CrunchBase indicate that the average time required to go public is 8.25 years; this information should be included into your exit strategy. 4

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Real EstateCrowdfunding

It’s possible that investing in real estate might be an excellent method to diversify your portfolio, and that crowdsourcing could be an option that’s more attractive to you than either direct ownership or a real estate investment trust (REIT). When it comes to investing, crowdfunding for real estate simply gives you two options: debt investments or equity investments.

When you make an investment in debt, what you are really doing is acquiring a mortgage note that is secured by commercial real estate. After the loan has been returned in full, a part of the interest will be given to you. This kind of investment is considered to have a lower level of risk than purchasing shares of stock; but, its returns are limited by the interest rate that is attached to the note. On the other hand, having direct ownership of the property is preferable since it relieves you of the responsibility of managing the property.

When you make an investment in equity, you are given a stake in the business or building. In this particular instance, returns are calculated as a percentage of the rental income that is brought in by the property. In the event that the property is sold, you will get a portion of the earnings from the sale. If you want to maximize your profits, equity investing could be the way to go, but doing so exposes you to a greater risk of losing money if your rental income suddenly reduces.

The low barrier to entry that is offered by equity crowdfunding and real estate crowdfunding to non-accredited investors is the primary advantage that both types of crowdsourcing provide. When compared to the tens of thousands of dollars that are frequently required to get access to private real estate transactions, the minimum investment required by many of the main platforms is just $5,000. This is a significant savings over the cost. Finance on a Peer-to-Peer Basis

This kind of financing could be interesting to non-accredited investors who want to put their money in the hands of other individuals rather than in businesses or property. Using technologies that facilitate peer-to-peer lending, individual consumers are able to organize fundraising campaigns for personal loans. Every potential borrower receives a risk assessment that is based on the borrower’s credit history. After that, investors may choose which loans to invest in based on the degree of risk that is associated with each loan.

If you want to have some control over how much risk you accept, this is a positive development since it gives you more options. At the same time, it assists you in estimating the sort of return on investment (ROI) that you may be able to anticipate from your investment. The higher the interest rate on the loan, the more money you will have in your pocket. This is because the higher the risk level of the borrower, the higher the interest rate.

To reiterate, a substantial financial investment is not required to get started with this kind of crowdfunded investing. You may begin financing loans via Lending Club or Prosper, which both allow non-accredited investors, if you have an extra twenty-five dollars in your bank account. 56

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Investment Limits for Non-Accredited Investors

It is not a free for all, despite the fact that non-accredited investors are now allowed to participate in crowdfunded enterprises according to the new Title III legislation. The Securities and Exchange Commission (SEC) has come to the conclusion that non-accredited investors should have a yearly investment cap placed on them. Your personal limit is established based on both your income and your net worth. Accredited investors are exempt from these restrictions in any event.

If you have a net worth that is less than $107,000 and an annual income that is less than $107,000, you are eligible to invest up to the greater of $2,200 or 5% of either your income or your net worth. If both your annual income and your net worth are more than $107,000, you have the option of investing up to 10% of each one of those amounts, whichever is lower, with a total cap on your investments of up to $107,000. 1

The Securities and Exchange Commission has a good cause for imposing this limitation. The amount of non-accredited investors who are not acquainted with crowdfunding or investing in general is intended to be kept to a minimum as a primary objective. The Securities and Exchange Commission (SEC) places restrictions on the amount of money an individual may put into the stock market by limiting the amount of money an investor stands to lose if a particular transaction is unsuccessful.

The SEC has mandated that this limitation be implemented so that it is possible to strike a compromise between permitting non-accredited investors to participate in the investment opportunities presented by startups and restricting the extent to which these investors might suffer losses. Since investing in startups is often considered to be a high-risk endeavor, the purpose of this initiative is to make it less risky for those who are not accredited investors and who may not be acquainted with crowdfunding or investing in general. The Securities and Exchange Commission (SEC) places restrictions on the amount of money an individual may put into the stock market by limiting the amount of money an investor stands to lose if a particular transaction is unsuccessful.

The Bottom Line

It is important for non-accredited investors to keep in mind that, despite the fact that Title III allows for universal participation, many crowdfunding platforms are unlikely to participate in the program. Because of this, the kinds of investments in which you are able to take part may be limited. Take into account the fees that are charged by each platform while you are thinking about alternative ways to invest your money. These fees may have an effect on the outcomes you get over the long run.

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