What is Crowdfunding?
Crowdfunding is the process of raising money to fund what is typically a business venture or project through many investors or donors using an online platform. As well as funding entrepreneurs, crowdfunding platforms also raise funds for a range of creative and charitable campaigns.
Under rules effective May 16, 2016, all U.S.-based investors now have the opportunity to participate in the capital raising activities of start-up and early-stage private companies. Businesses based in the U.S. that meet certain criteria are able to offer securities to individuals through online funding ‘portals’.
What is Private Equity Crowdfunding?
Private Equity Crowdfunding offers individual investors the opportunity to fund a business in return for an ownership share in the company, typically in common or preferred stock.
Private equity investing itself has been around for years, but has tended to be the preserve of ‘angel’ investors and venture capitalists. More recently, high net worth accredited investors have been able to participate in private equity investing through online funding portals.
All individuals investing in private equity crowdfunded securities offerings must comply with limitations based on investor’s net worth and annual income. Due to the risks involved with this type of investing, U.S. regulatory authorities have set specific limits for these transactions in any 12-month period.
Do I have to invest through an online platform?
An individual can invest in private equity crowdfunded offerings only through an online platform. These platforms include funding portal websites and mobile apps, as well as broker-dealer portals. Companies may not offer crowdfunded securities to investors directly. Investors must use a registered broker-dealer or registered funding portal.
Please consult with an investment advisor regarding your overall investment goals and risk parameters to determine how private equity investing may fit into your overall investment strategy.
What is the Investor Education Requirement?
Funding Portals must provide individual investors with educational information in compliance with regulatory requirements. The investor education requirement is intended to facilitate a better understanding of the general features and risks to which an individual is exposed when making a private equity investment online via a crowdfunding portal.
Consultation with a professional investment advisor before making any private equity investment is a prudent step for individuals planning to make an investment in a company via a crowdfunding portal.
What are the Private Equity Investment Limitations?
If either your annual income or your net worth is less than $100,000, then during any 12-month period, you can invest up to the greater of either $2,000 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 $100,000, 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 $100,000.
Calculating net worth involves adding up all your assets and subtracting all your liabilities. The resulting sum is your net worth.
For purposes of determining eligibility in crowdfunding offerings, the value of your primary residence is not included in your net worth calculation.
Please note: 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 exceeds your home’s likely resale price), 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.