Crowdfunding: What it means for investors

As President Obama signed the Crowdfunding bill into law on Thursday, there are new opportunities for startups and investors. But for the latter, they will not see the full effect of the bill until 2013.

Obama signed the JOBS Act's Crowdfunding bill into law on Thursday, where the purpose of the law is to make it easier for startups to grow, hire employees and contribute the the sluggish economy recovery,  Mashable reports.

The bill is what some may call a financial innovation that is supposed to open up new doors for both startups and investors. And with regards to the latter, it allows almost anyone to invest in a startup.

In the amended bill, the Senate gave the U.S. Securities and Exchange Commission 270 days to interpret and issue the rules for the public. This means that potential investors may have to wait until 2013 before it's legal to make an investment.  But in the meantime, there are a few things they can consider.

In about 90 days, the Access to Capital for Jobs Creators Act should go in effect and this will allow companies to tell the public that they are raising capital. In the past, this type of solicitation was illegal and could exempt the company from raising capital. But now, startups should be able to solicit their deal, which means that more investors will be able to hear about it.

The condition is that only accredited investors can participate in those deals where the company is soliciting. This again mean that it only applies to investors who fall into these three following categories:

- The net worth is more than $1 million, excluding their home

- The investor has $200,000 in new income for the last two years and a reasonable expectation to make $200,000 in the current year

- The investor has $300,000 in household income for the last two years and a reasonable expectation to make $300,000 in the current year.

If they don't fall into those brackets, they have two options. First, they can look at campaigns on Kickstarter or Indiegogo. Although an investor can't make an actual investment in a company, they will get something for their contribution and looking through the projects while treating them like investments is a good way to start learning how to filter the good from the bad.

Second, they can also sign up at Angelist. If they find a startup that they like, they can contact the founders and see if they are raising capital. The investor might have to invest on a more traditional angle level amount of $25,000 to $50,000.

If an investor choose to wait until 2013, then as a new investor they will need to fill out a suitability questionnaire which will ensure that they understand the risks associated with investing. There are some restrictions on how much they can invest in a given year. This measure will help protect investors form putting too much of their money into potentially risky companies.

As an example, if one investor make $75,000 per year, they can invest $3,750. If one investor make more than $100,000 annually, then they can invest 10% of their income or net worth; with a maximum total investment of $100,000 per year. If an investor make $250,000, then they will be able to invest up to $25,000 in startups in a given year.

The most important part for an investor is to do the homework on the company they select, conduct a due diligence by talking to the founders, reviewing a business plan or pitch deck, researching the competition and the market size, and looking at what the company intends to do with the funds.

[Via Mashable]

Photo: istock

This post was originally published on Smartplanet.com

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