Early-stage or startup businesses can take advantage of crowdfunding provisions established by the Jumpstart Our Business Startups Act (JOBS Act) that enable the offering and selling of securities. Under these provisions, every five years the dollar limits for crowdfunding are to be adjusted. On May 5, 2017, the SEC issued its inflation-adjusted crowdfunding dollar amounts.
Raising Capital With Crowdfunding
Crowdfunding is a means by which businesses can raise capital via the Internet through a limited number of investments from a wide range of investors. Per SEC rules, the general public is permitted to invest in startup companies that are raising capital.
Role of the FINRA
The Financial Industry Regulatory Authority (FINRA) has the responsibility of superintending the registration of various crowdfunding portals to ensure their adherence to FINRA rules and federal securities laws. Funding portals and broker-dealers that are FINRA members and also registered with the SEC may offer and sell securities for issuers to public investors by means of crowdfunding.
Inflation-adjusted Investing Limits
The investment limits described below apply to crowdfunding investments in accordance with the Jumpstart Our Business Startups Act. It is important to understand that these investments come with sizable risk that could include losing a portion of or an entire investment.
Any person can invest in crowdfunding offerings, such as bonds and stocks. However, the risks involved necessitate limits imposed by the SEC as to how much may be invested over the course of a 12-month period. Annual income and net worth are the constraints that determine the permissible amount of these inflation-adjusted investments. They are as follows:
* With a yearly income or net worth below $107,000 within any 12 month period, you may invest the greater of:
5 percent of the lesser of your net worth or annual income
* With a net worth and yearly income at least $107,000, you may invest a maximum of 10 percent of your net worth or yearly income (whichever is less) during any 12 month period, but not more than $107,000
Continuing with an example of the crowdfunding investment rules under the Jumpstart Our Business Startups Act, let’s say your net worth is $100,000 and your yearly income is $200,000. The rules allow you to invest the greater of $2,200 or five percent of $100,000 ($5,000) during the course of a 12-month period. Therefore, in this example you can invest $5,000 over a period of 12 months.
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