New Fundraising Rules for Some Start-Ups

Ruth Simon reported in today’s Wall Street Journal that, “Small businesses will soon be able to sell shares to Main Street investors on crowdfunding portals, instead of trying to lure those backers with promises of T-shirts, coffee mugs or other merchandise.

“Starting Monday, small companies and startups can raise as much as $1 million online from ordinary investors in a 12-month period. Until now, federal securities laws allowed only wealthy individuals, or so-called accredited investors, to participate in such offerings. The new fundraising option stems from the 2012 Jumpstart Our Business Startups Act, or JOBS Act.

“But even supporters of equity crowdfunding say it is likely to get off to a slow start, in part because of the complexity and newness of the process, higher costs and disclosure requirements.”

Ms. Simon explained that, “Under the rules, individuals with income or net worth of less than $100,000 can invest the greater of $2,000, or 5% of either their annual income or net worth, whichever is lower, in small-scale securities offerings in a 12-month period. Investors with income and net worth of at least $100,000 can invest up to 10% of their annual income or net worth, whichever is lower.

“But investors seeking the next Facebook or Uber should proceed with caution. ‘These are companies that are new or close to brand new and are speculative,’ cautions Washington State Securities Administrator William Beatty. ‘You don’t want to invest more in any one company than you can afford to lose.’ Even for successful companies, holding periods are likely to run five to seven years.”

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