While it’s always important to protect your investments, it has become particularly important with upcoming crowdfunding regulations coming to pass. When the Jumpstart Our Business Startups (or “JOBS”) Act became law in April of 2012, many retirement savers anticipated the new investment opportunities they’d have. The stated purpose of the JOBS Act is to make it easier for small and medium sized businesses to raise capital outside of the traditional legal and regulatory framework. Supporters of the JOBS Act argued that the disclosure and registration requirements that applied to fundraising efforts directed towards small investors were prohibitively expensive and largely unnecessary.
The goal of the new crowdfunding regulations is to reduce the burden on small businesses that look to raise money from individuals who would otherwise qualify as “accredited investors.” Accredited investors are individuals who have a net worth of over $1 million or who have earned over $200,000 in each of the last two years – because of their wealth they are assumed by the Securities and Exchange Commission to be better able to protect themselves against fraudulent investments, and are therefore able to participate in private investment transactions that don’t have high levels of statutory disclosure.
The JOBS Act requires a new set of crowdfunding regulations that will allow a new “crowdfunding” method for non-accredited investors to invest in non-public companies.
An overview of the anticipated crowdfunding regulations. New regulations implementing the JOBS Act are expected to go into effect in early 2013. These regulations allow the creation of Internet-based funding “portals,” through which small companies can solicit investors, and investors can find investing opportunities. The amount that an individual can invest in these types of investments will be capped each year, with the cap amount depending on the individual’s income.
How to protect your investments, and yourself. As with any other investment you make, the most important aspect of keeping yourself safe is to obtain as much information as possible about your potential crowdfunding investment. Don’t assume that the information you receive through a crowdfunding portal will be enough to make your decision. If you don’t believe you have enough information, ask the company for more. And if you don’t get an adequate response, then move on to research your next possible investment.
Protect your investments by learning about limits. As noted above, the crowdfunding regulations contain a built-in protection that limits the amount of money you can invest each year. For the highest-earning investors, this amount will be $10,000 annually. This doesn’t mean you should make it a goal to “max out” your crowdfunding investments each year. Given the high degree of risk that’s likely to be associated with the companies who will use the crowdfunding process, you should protect your investments by limiting the amount invested to an appropriate level within your overall portfolio.
Protect your investments by understanding anti-fraud remedies. This may be one of the biggest points that we still need to see in the forthcoming crowdfunding regulations. Before you invest through any of the crowdfunding portals, understand what other legal protections you may have.
The new crowdfunding Internet portals can provide exciting new opportunities for all investors. Be sure to protect your investments, and yourself to the greatest extent possible so that you can maximize your investment returns.
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