Crowdfunding: A New Source of Capital

With the passage of the JOBS Act of 2012, effective in May 2016, small businesses can now raise capital through online solicitation of investors or crowdfunding. In essence, the general public can now directly invest in start-up and emerging companies.

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Crowdfunding: A New Source of Capital

Crowdfunding: A New Source of Capital

Crowdfunding is generally defined as the use of the Internet to raise money to accomplish a stated goal. Its roots are primarily in the donation—a rewards-based sphere in which charities seek contributions or individuals seeking funds to financially support an endeavor and in turn receive an award (e.g., donate money to help me record an album and receive a free signed album).

With the passage of the JOBS Act of 2012, effective in May 2016, small businesses can now raise capital through online solicitation of investors. In essence, the general public can now directly invest in start-up and emerging companies.

The Financial Industry Regulatory Authority (FINRA) oversees the registration of crowdfunding portals and monitors them to ensure that they comply with the relevant federal securities laws and FINRA rules.

Anyone can invest in crowdfunding investment offerings; because of the risks involved, however, the amount that individuals can invest during any 12-month period is limited. The investment limitation depends on an individual’s net worth and annual income:

• If an individual’s annual income or net worth is less than $100,000, then investments are limited during any 12-month period to the greater of either $2,000 or five percent of the lesser of annual income or net worth.
• If both annual income and net worth are equal to, or more than, $100,000, then investments during any 12-month period are limited to 10 percent of annual income or net worth, whichever is less, but not to exceed $100,000.

Major Ways to Invest Via Crowdfunding

Individuals—potentially your clients—may discover three ways to take advantage of this new investment avenue:

• Equity Investments—Individuals may invest in shares of small and early stage companies, but these investments may present significant investment and liquidity risks.
• Real Estate—Real estate crowdfunding sites may offer individuals unusually low minimum investments to gain a share of ownership in a pool of properties. The quality of management and degree of diversification may vary widely among providers.
• Peer-to-Peer Lending—This allows individuals to create fundraising campaigns for personal loans and permits individuals to lend directly to prospective borrowers. While it is a chance to earn a higher rate of interest on cash than may be currently available in today’s marketplace, it may hold substantial credit risk to the individual lender.

It’s difficult to project the enthusiasm level with which investors will embrace crowdfunding investing, but advisors should be aware that raising capital has just gone direct.

See referenced disclosure (2) (3) at http://blog.americanportfolios.com/disclosures/ 

About The Author

Kimberly A. Branch, CFP®

 

Vice President of Marketing Strategy 
631.439.4600, ext. 217 

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