Investor Alert – SEC Adjusts Crowdfunding Rates

By Abigail Warren, Fall 2017 IAC Student Intern

FINRA issued a report alerting investors that the SEC adjusted crowdfunding rates.  Crowdfunding sparks interest in investors hoping for big returns, but beware, the risk is real.  The SEC warns investors of the high risk in investing in new start-up businesses through crowdfunding.  FINRA voices concerns on the liquidity risk, warning investors that the ability to resell in the first year is extremely limited.

What is crowdfunding?

Crowdfunding, originating in Silicon Valley, is a way for emerging start-up companies to raise capital through small investments from a large pool of investors.

The JOBS Act of 2012 establishes provisions that allow start-up companies to sell securities and requires the SEC to implement and regulate these investments.  In 2015, the SEC adopted rules (Regulation Crowdfunding) that allow the public to participate in crowdfunding investments.   FINRA monitors the portals, overseeing registration (intermediaries offering and selling these securities must register with the SEC) and compliance with FINRA rules and federal securities laws.

Investment Limits

Due to the risky nature of crowdfunding, the SEC limits the amount you can invest within a twelve-month period.  The SEC adjusts these limits every five years for inflation, most recently this past May.  An individual’s net worth and/or annual income limits his or her investment.  Currently, per the SEC, if your annual income or net-worth is less than $107,000, you are limited to a $2,200 investment or five percent of your income or net-worth, whichever is less.  If your income and net-worth are over $107,000, you can invest up to ten percent of either, but your investment is limited to $107,000.

Calculating Net Worth

The SEC allows married individuals to use joint calculations in determining net worth, regardless whether it is held jointly or by one spouse, however the investment cannot exceed the individual limits.  And, you don’t count your primary residence when calculating your net-worth.  Check out the SEC for more information on net-worth and investment limitations.

Who can invest?

Anyone.  An individual can invest through a broker-dealer’s online platform or a funding portal.  These intermediaries should be FINRA members and registered with the SEC to sell these securities to the public.  Investors can check a broker-dealer’s and funding portal’s registration through FINRA. Companies offering securities through crowdfunding must disclose certain company information to potential investors and broker-dealers and funding portals are required to provide information to investors.  Check out FINRA for a list of required disclosures and tips on crowdfunding.