Equity crowdfunding for non-accredited investors

The Securities and Exchange Commission (SEC) approved Title III of the JOBS act last week. The new rules haven’t come into effect yet as we’re now in a 90 day commenting period. However, if the proposed changes are confirmed, there will be important ramifications for equity crowdfunding in the US.

Here’s a Forbes article with a comprehensive summary of the changes brought by Title III. The most important points are:

    • Equity crowdfunding expands to include non-accredited investor participation
    • Startups and small businesses can raise up to $1M in a period of a year
    • Investors making <$100K per year can invest the greater of $2K or 5% of annual income
    • Investors making >$100K per year can invest up to 10% of their annual income

In the past, equity crowdfunding platforms only allowed accredited investors to make investments. The SEC’s website describes an accredited investor as someone who meets at least one of the criteria below:

  • Earned income that exceeded $200K (or $300K together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR
  • Has a net worth over $1M, either alone or together with a spouse (excluding the value of the person’s primary residence).

By opening up equity crowdfunding to people with a salary less than $200K, or even less than $100K, the SEC has opened the door for many more people to invest into private startups. As a result, there will be more investment dollars available for startups.

However, this capital will come from people with less money to lose than before. Losing $5K or $10K if you have a $1M net worth or make more than $200K per year isn’t something you want, but it’s something you can stand. Assuming you save 50% of your salary, losing $5K or $10K if you make $100K per year is equivalent to losing 10-20% of your savings for that year. You’ll feel the impact.

So the new rules will be a win for startups. They’ll also be a win for some non-accredited investors who invest in the right startups. But for non-accredited investors as a whole, their impact is a lot less clear.

In theory, non-accredited investors should only invest what they can afford to lose. Title III’s investment limits are designed to achieve that goal. In practice, they may produce more pain than gain. Even if you stick to the rules, investing 10-20% of your annual savings in illiquid startups with low success rates while competing with professional investors who do the same for a living is a very risky game.