NEW YORK—A new kind of crowdfunding will give the average American a chance to invest in small companies and startups. But before you think about jumping in, there are some important things to keep in mind.
Under the new rules from the U.S. Securities and Exchange Commission, small businesses can raise up to $1 million a year by selling stakes in the company. The money raised may be used to grow the business. Early investors can earn money if the business succeeds. But the North American Securities Administrators Association urges caution to those thinking about giving their money to a startup.
Here are some tips:
WAIT: The rules won’t go into effect until sometime next year, and the exact date is not known yet. So sit tight and be wary of companies seeking cash right away.
KNOW THE RISK: Buying stock in any company, large or small, carries risk. But small businesses and startups can be even risker, the NASAA said. Some 50 percent of small businesses fail within their first five years.
RESEARCH: The SEC is requiring the small companies that are crowdfunding to provide financial statements. Make sure to check how much revenue it earns and if it’s profitable. Information will also be available about its founders and board. Check who they are and their track record with past businesses.
INVESTMENTS MAY BE LONG-TERM: Know that you may be stuck with an investment for a long time. The NASAA said it may be hard or impossible to sell stakes that you may buy.
KNOW THE RULES: The SEC put caps on how much money people can invest. Those with annual income or net worth below $100,000 can invest up to 5 percent of their yearly income or net worth, or $2,000 if that is greater. Those who earn more money can invest up to 10 percent. But no one can invest more than $100,000 in crowdfunding offerings during a 12-month period.
