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Crowdfunding: Changing the Way People Invest

Crowdfunding: Changing the Way People Invest

By | 06.01.12
Crowdfunding: Changing the Way People Invest

New legislation is changing the way people will be able to invest in small- to mid-sized companies. Previously only the domain of the wealthy, venture capitalism is now opening up to ordinary investors.  This will allow ordinary investors the opportunity to own a piece of the next big thing such as Google or Twitter.

The Jumpstart Our Business Startups (JOBS) Act has been signed into law and includes “crowdfunding” provisions which ease current federal regulations. These regulations basically exclude any non-wealthy investors from investing in venture capitalism. However, the JOBS Act, which begins 2013, will allow nearly any person to invest in crowdfunding regardless of income or financial expertise.

Currently, startups cannot raise funds from the internet or broadcast media. Startups are also limited to “accredited investors,” those who make a $200,000 income individually, $300,000 income as a couple, or those with a net worth of $1 million excluding the value of their home. All in all that leaves out a vast majority of Americans able to invest in startups. Originally enacted in the 1930s to protect investors, these regulations are viewed as outdated, even by the SEC. Now with the JOBS Act, entrepreneurs will be able to obtain investments online and through crowdfunding.

Just what exactly is crowdfunding? Crowdfunding is the collective investment by people pooling their resources in order to support efforts begun by others. In the business world it is funding a startup company or buying stocks in a small- to mid-size company collectively, with other investors, usually online. This is valuable for entrepreneurs looking for more investors and is a modern step from current laws.

Ordinary investors will be able to invest up to $10,000 in these small companies, and startups will be able to raise up to $50 million from the public before registering with the SEC. The JOBS Act also allows an increase from the current 500 to a proposed 1000 shareholders before the required SEC registration. With all these new regulations, entrepreneurs and startups will be able to tap into a much larger group of investors, making it easier for these companies to raise capital.

References

Gustin, Sam. “Will Crowdfunding Drive a New Wave of Startup Investing?” Small Business. TimeBusiness. 3/13/12. (5/29/12.) http://bx.businessweek.com/crowd-financing/view?url=http://business.time.com/2012/03/13/will-crowdfunding-drive-a-new-wave-of-startup-investing/

Tozzi, John. “Investing In Main Street Instead of Just Wall Street” Local Economies. BloombergBusinessweek. 4/25/12. (5/29/12.) http://www.businessweek.com/articles/2012-04-25/investing-in-main-street-instead-of-just-wall-street

Weise, Karen. “$1,000 and a Click: Buying Stock the Crowdfunding Way” Angel Investing. BloombergBusinessweek. 4/18/12. (5/29/12.) http://www.businessweek.com/articles/2012-04-18/5-000-and-a-click-buying-stock-the-crowdfunding-way

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