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Crowdfunding, Where Have You Been All My Life?

One of your first questions may be, “if this Crowdfunding thing is so great, why am I only now hearing about it?”  Well, investing in small startup and growth businesses is not new – it was just limited to high net worth individuals, called accredited investors.  Accredited investors are individuals with a net worth of at least $1 million (not including their primary residences) or who have earned over $200,000 per year ($300,000 if married) in each of the last two years, with an expectation to earn the same this year.  Not you?   Me neither.

In April this year, the JOBS Act was signed into law, and the rules for who can invest in small companies were changed.  Now you do not have to be an accredited investor to invest; anyone in the general public can invest, although the amount you can invest is limited based on your net worth or income.  I will be discussing investment limits in my next post.

You may be asking yourself, why were these rules in place before, and why are they changing now?  This was a law from the 1930’s, and it was put in place because after the stock market crash of 1929 and the ensuing depression, many everyday Americans, not just the wealthy, lost their money in what seemed like good investments.  Along with a long list of rules that made investing safer for everyone, the Securities Acts of 1933 and 1934 were passed to make sure that if this ever happened again, it would not happen to everyday Americans, like the ones who lost their entire savings in the crash.  They added the accredited investor rule because wealthy individuals were deemed “sophisticated,” enough to make riskier investment decisions and/or absorb the loss a little better than a normal American would.

Now that it is 2012, Congress decided that since information is so much easier to come by now than it was in the 1920’s, that the risk of fraud is lower now than it was then.  However, to keep protections in for smaller investors, they passed the JOBS Act with the investment limits I mentioned above to make sure that people’s losses are limited (again, more on limits in the next post).  So now that people have more access to information and the SEC is protecting investors with investment limits, the time was right to open up the opportunity for everyday Americans to contribute to entrepreneurs, especially now when access to startup and growth capital for entrepreneurs has been hard to come by.  Now entrepreneurs have a new source of capital, and everyday Americans have an alternative investment opportunity to the stock market.

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This entry was posted on September 9, 2012 by in Crowdfunding Basics, New to Investing and tagged , , .
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