Prior to the JOBS Act, investing in startups and new ventures was only available to certain high net worth (accredited) investors. The JOBS Act introduced Crowdfunding which allows companies to raise up to $1,070,000 in a 12-month period from both accredited and non-accredited investors. However, because of the risks associated with investing in startups and private companies, the SEC limits the amount an individual can invest in such offerings. The SEC’s Office of Investor Education and Advocacy published “Investor Bulletin: Crowdfunding for Investors” which offers the following guidance on your investment limitations. To read the full Investor Bulletin, please click here

Investor Bulletin: Crowdfunding for Investors (May 10, 2017)

Crowdfunding generally refers to a financing method in which money is raised through soliciting relatively small individual investments or contributions from a large number of people. Over the last few years, crowdfunding websites in the United States have proven a popular way by which to solicit charitable donations and to raise funds for artistic endeavors like films and music recordings.

Under recently adopted rules, the general public will have the opportunity to participate in the early capital raising activities of start-up and early-stage companies and businesses. Starting May 16, 2016, companies can use crowdfunding to offer and sell securities to the investing public.

Can I make a crowdfunding investment?

Anyone can invest in a crowdfunding securities offering. Because of the risks involved with this type of investing, however, you are limited in how much you can invest during any 12-month period in these transactions. The limitation on how much you can invest depends on your net worth and annual income.

If either your annual income or your net worth is less than $107,000, then during any 12-month period, you can invest up to the greater of either $2,200 or 5% of the lesser of your annual income or net worth.

If both your annual income and your net worth are equal to or more than $107,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is lesser, but not to exceed $107,000.

The following table provides a few examples:

Investment Limit Calculator

1 
2 
Annual Income Net Worth Calculation 12-month Limit
$30,000 $105,000 greater of $2,200 or 5% of $30,000 ($1,500) $2,200
$150,000 $80,000 greater of $2,200 or 5% of $80,000 ($4,000) $4,000
$150,000 $107,000 10% of $107,000 ($10,700) $10,700
$200,000 $900,000 10% of $200,000 ($20,000) $20,000
$1.2 million $2 million 10% of $1.2 million ($120,000), subject to $107,000 cap $107,000

Joint calculation. You can calculate your annual income or net worth by jointly including your spouse’s income or assets. It is not necessary that property be held jointly. However, if you do calculate your income or assets jointly with your spouse, each of your crowdfunding investments together cannot exceed the limit that would apply to an individual investor at that annual income or net worth level.

How do I calculate my net worth?

Calculating net worth involves adding up all your assets and subtracting all your liabilities. The resulting sum is your net worth.

For purposes of crowdfunding, the value of your primary residence is not included in your net worth calculation. In addition, any mortgage or other loan on your home does not count as a liability up to the fair market value of your home. If the loan is for more than the fair market value of your home (i.e., if your mortgage is underwater), then the loan amount that is over the fair market value counts as a liability under the net worth test.

Further, any increase in the loan amount in the 60 days prior to your purchase of the securities (even if the loan amount doesn’t exceed the value of the residence) will count as a liability as well. The reason for this is to prevent net worth from being artificially inflated through converting home equity into cash or other assets.

While your individual circumstances will vary, the following table sets forth examples of calculations under the net worth test in order to determine crowdfunding investment limits:

Jane Doe John Smith James Lee
Primary residence
(Not included except for related liabilites below):
Home value $300,000 $300,000 $300,000
Mortgage $200,000 $200,000 $200,000
Home equity line:
  More than 60 days old $20,000
  Less than 60 days old $10,000
Included assets:
Bank accounts $20,000 $20,000 $20,000
401(k)/IRA accounts $100,000 $100,000 $100,000
Other investments $50,000 $50,000 $50,000
Car $20,000 $20,000 $20,000
Total included assets $190,000 $190,000 $190,000
Included liabilities:
Student and car loans $100,000 $100,000 $100,000
Other liabilities $20,000 $20,000 $20,000
Portion of mortgage underwater $30,000
Home equity line
(Less than 60 days old)
$10,000
Total included liabilities $120,000 $130,000 $150,000
Net Worth $70,000
$60,000
$40,000

Regulation Crowdfunding imposes transfer restrictions on the shares issued in crowdfund offerings. Unlike companies that are traded on a public exchange (i.e. Nasdaq or NYSE), the securities offered under Regulation Crowdfunding are private (not registered with the SEC) and are non-transferable (restricted) for a period of one year. This means that you are restricted or prohibited from reselling your shares for the first year, except for transfers to the following:

  • to the company that issued the securities;
  • to an accredited investor;
  • to a family member;
  • in connection with your death or divorce or other similar circumstance;
  • to a trust controlled by you or a trust created for the benefit of a family member;
  • as part of an offering registered with the SEC.

You should also be aware that even after the restricted period passes, there is no guarantee that a market will exist or that anyone will want to acquire your shares.

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