Less than a decade ago, early-stage companies had a tough time getting funding as only an elite few were permitted by law to invest in them. Back then, seed investing was a game for the ultra-rich and well-connected.
The security type with the highest return rate was kept just out of reach for the general public. Every day people weren't permitted to grow their wealth by investing in startups.
It used to be, if you wanted to invest in startups, you needed to be an accredited investor. This meant, having an annual income of more than $200,000 ($300,000 for joint income), or, having a net worth of over $1 million.
If you wanted to invest in high-risk, high-reward startups, you had to bring the big bills. There just wasn’t an avenue for average investors to get into this space.
But, this all changed with the legendary JOBS Act.
On April 5, 2012, President Obama signed the Jumpstart Our Business Startups (JOBS) Act. This piece of legislation loosened regulations imposed by the Securities And Exchange Commission on small businesses.
Among many other things, the JOBS Act gave normal investors with average amounts of money the opportunity to take part in Regulation Crowdfunding.
What is Regulation Crowdfunding?
While many great things in the JOBS Act stimulate entrepreneurship and investing, there is one particular part worth discussing—Title III.
Title III is the section of the JOBS Act that fundamentally changed what it means to be an angel investor. Title III of the JOBS Act created Regulation Crowdfunding.
This gave rise to sites like WeFunder, SeedInvest, and Republic that connect thousands of startups with tens of thousands of investors. Funding takes place in a secure, regulated environment.
Anyone, regardless of their net worth, can use these platforms and invest in private companies.
How to Make a Startup Investment
Once you have done some research and understand the basics of angel investing, you are ready to find a platform and make an investment. Here’s where to begin.
Choosing a Site
An important factor that will define your investing experience is the equity crowdfunding platform that you choose.
The most important thing to consider is the company’s track record. There are many long-running and healthy investing platforms, so never take a chance on a site without adequate information.
Some of the most popular equity crowdfunding platforms are Wefunder, Republic, and StartEngine. These are reputable sites that have large followings of investors and entrepreneurs.
There are different types of crowdfunding regulations that affect who can invest and how much.
Here are the three levels of regulation that you’ll run into on these platforms—Regulation, Regulation D, and Regulation A+.
In this article, we will be dealing with Regulation Crowdfunding due to its popularity and accessibility. The only private equity investments non-accredited investors can make are Regulation Crowdfunding investments.
Joining a Platform and Making Your First Investments
There are a few simple steps to complete before placing your first investment.
Signing Up - You will need to create an account on the platform and enter in some basic information. Apart from your username and password, you need to provide your net worth and income, accreditation status, and select the industries that interest you.
Finding Your startup - Based on your areas of interest, you will be recommended startups. You can browse startups by industry, number of funders, area, or what’s trending on the site.
Due Diligence - You should study the startups that interest you. Each startup listing will have a page with valuable information. Here you can see the founders, investment goals, updates, and FAQs
Know Your Security Types - There are different types of investments you can make on Regulation Crowdfunding platforms. The most common types are common stock, preferred stock, SAFE agreements, and convertible notes.
Invest - Now you’re ready to invest. You can choose how much you would like to contribute and in a few clicks, you have invested in a startup!
Following Up Post-Investment
There are a few things to follow up on post-investment. An angel investment is a long-term investment, and you will need to keep track of it over time. Here's what to expect.
Proof of Purchase
You will receive a proof of purchase that shows your shares and when you purchased them, along with what steps to take next. This is like your receipt for buying a part of the company.
Where Did My Money Go?
An equity crowdfunding platform can’t legally touch your money.
When you invest, your money is transferred to an escrow account. The money will be handled by a reputable, third-party financial institution until the crowdfunding campaign is finished.
If the campaign succeeds, the money goes to the startup. Otherwise, your money goes right back to you.
Startup founders will send you periodic updates. This usually happens once a quarter, but some teams do it more often.
You also have the chance to ask questions in the Q&A section of the startup page.
Finally, companies are legally required to send out a detailed Annual Report 120 days after the end of their fiscal year. This is a comprehensive update on the company’s latest financials, board members, and accomplishments.
If things go well, you will have some money coming your way. You will be paid through the crowdfunding platform depending on several factors.
The type of security you purchased is important. Stock without dividends will take the longest to yield a return. Your return will come only once the startup reaches an Initial Public Offering or is acquired.
If your investment agreement offers dividends, you may see a return much sooner, depending on the company’s revenue.
Lastly, returns from revenue shares depend on the projections for future revenue. The faster the startup makes money, the less you will have to wait to see some green.
Rules and Limitations for Angel Investors
In this section, you will learn exactly how much money you can invest in startups each year, which depends on what kind of investor you are and your financial situation.
The Securities and Exchange Commission (SEC) recently changed the requirements for “accredited investor” status.
The SEC is an independent government agency that regulates and oversees the US securities market. The SEC makes the rules that govern stock trading, venture capital, and angel investing.
Up until now, to be an “accredited investor” you needed an annual income of more than $200,000 (or $300,000 for joint income). Alternatively, if you didn’t meet the income requirement, you could become accredited if your net worth was over $1 million.
While these limitations still hold true, the SEC is adding an alternative avenue for gaining accreditation.
Now, rather than simply basing accreditation on finances, investors can qualify based on defined measures of professional knowledge, experience, or certifications.
Essentially, experienced and knowledgeable investors will now be able to qualify for accreditation regardless of their net worth and income.
Current Investment Limits For Non-Accredited Investors
While it’s true that with the JOBS Act, anyone can partake in Regulation Crowdfunding, there are still limits in place that restrict the amount of money you can invest. Your limit is based on your net worth and income.
The tiers of investor limits are as follows:
If you make $150,000 per year and your net worth is, let’s say, $80,000, you can invest the greater of $2,200 or five percent of $80,000 ($4,000) during a 12-month period.
With these figures, the maximum you can invest is $4,000 per year.
As you can see, the more money you make, the more you can invest. However, this is still an incredibly open system, much more forgiving than when you had to be worth $1 million to invest at all!
And keep in mind, this investment cap is per year. Every 12 months your limit resets and you can invest again based on your new net worth or income.