The JOBS Act Explained

A New Way of Startup Investing 

The angel investing space is now so accessible that nearly anyone can invest for as little as $100. And there is so much opportunity here that I’m doing everything I can to show people just what they’re missing!
That’s why I’m giving away my free ebook Startup Investor’s Playbook, to show you that anyone can profit off of startup investing.

But things weren’t always this good.

Less than a decade ago, early-stage companies had a tough time getting funding as only an elite few were permitted by law to invest in them. Back then, seed investing was a game for the ultra-rich and well-connected.
That’s right, the security type with the highest return rate was kept just out of reach for the general public. Every day people weren’t permitted to grow their wealth by investing in startups.

Where We Came From

 

It used to be, if you wanted to invest in startups, you needed to be an accredited investor. This meant, having an annual income of more than $200,000, or $300,000 for joint income. Or, it meant having a net worth of over $1 million.

If you wanted to invest in high-risk, high-reward startups, you had to bring the big bills. There just wasn’t an avenue for average investors to get into this space.

The term angel investor carried an air of exclusivity that still exists to this day.
But, this all changed with the legendary JOBS Act.

The Big Change

 

On April 5, 2012, a piece of regulation was signed that kicked open the doors of angel investing forever.
On this day, President Obama signed the Jumpstart Our Business Startups (JOBS) Act. This piece of legislation loosened regulations imposed by the Securities And Exchange Commission (SEC) on small businesses.

Proponents of the JOBS Act knew that the SEC’s rules and regulations were preventing startups from getting the funding they needed. The idea is — when raising capital is easy for businesses, entrepreneurs win, investors win, and the economy as a whole wins.

Among many other things, the JOBS Act gave normal investors with average amounts of money the opportunity to take part in Regulation Crowdfunding.

Title III: Regulation Crowdfunding

 

While many great things in the JOBS Act stimulate entrepreneurship and investing, there is one particular part worth discussing.
I’m talking about Title III.

This is the section of the JOBS Act, adopted by the SEC in 2015,  that fundamentally changed what it means to be an angel investor. Title III of the JOBS act relates to online startup investing — it created Regulation Crowdfunding.
Whether you know it or not, Regulation Crowdfunding is probably the whole reason you’re here.

What this means, is that anyone can invest in startups through SEC regulated brokers and websites. This was the long-awaited change that leveled the playing field. Now, non-accredited investors can invest in startups for and grow their wealth like the elite.
This gave rise to sites like WeFunder and SeedInvest that connect thousands of startups with tens of thousands of investors. Funding takes place in a secure, regulated environment. These platforms have led to a renaissance of startup activity.

Starting your journey as a startup investor has never been easier.

Now, I’m sure you’re thrilled to start investing in startups and grow your wealth like the elite. Hold on, we’ll get there. First, you should understand some of the rules and limitations of Regulation Crowdfunding laid out by the JOBS Act.

Rules for Investors

 

Regulation Crowdfunding by design is a relatively small type of funding. Startups are limited to raising only around $1 million in a 12-month period. Investors are also limited, only being allowed to invest a certain amount based on their income and net worth.
According to the SEC, if an investor’s annual income or net worth is less than $107,000, they can invest the greater of $2,200 or 5% of the lesser of their income or net worth, per year.

I know, this can get a bit confusing. Let’s check out this table to see how much the SEC allows you to invest.

Investor’s

Annual Income

Investor’s

Net Worth

Calculation 12-month Limit
$30,000 $105,000 Greater of $2,200 or 5% of $30,000 ($1,500) $2,200
$150,000 $80,000 Greater of $2,200 or 5% of $80,000 ($4,000) $4,000
$150,000 $107,000 10% of $107,000 ($10,000) $10,700
$200,000 $900,000 10% of $200,000 ($20,000) $20,000
$1.2 million $2 million 10% of $1.2 million ($120,000), subject to cap $107,000


As you can see, the more money you make, the more you can invest. However, this is still an incredibly open system, much more forgiving than when you had to be worth $1 million to invest at all!

And keep in mind, this investment cap is per year.

Even if you’re on the lower end of the spectrum, $2,200 per year spread across many startups gives you HUGE return potential. A successful startup exit can return 20 to 50 to even 100 times your initial investment.

We go over startup exits — IPOs, acquisitions, and more — as well as proven investing strategies in our new, free ebook.

Startup Funding Requirements

 

This type of funding is still regulated by the SEC to keep things safe. Depending on the startup type and how much money the founders are seeking, different rules apply.
The more money a startup is looking for, the greater their responsibility to investors. Here’s how the SEC breaks it down:

  • Founders seeking $107,000 or less must show financial statements and tax returns.
  • Founders seeking $535,000 or less must show financial statements that are reviewed by an accountant.
  • Founders seeking $535,000 or more must show financial statements that are reviewed by an accountant for their first offering. After the first offering, they must show financial statements audited by an independent, public accountant.

Also, not every company can even qualify for Regulation Crowdfunding. The SEC has to approve the company.

To qualify for Regulation Crowdfunding, a startup must:

  • Be a U.S.-based company
  • Comply with all annual reporting requirements
  • Have a specific business plan or plan to engage in a merger or acquisition with another company

Lastly, a startup can only raise crowdfunding through a middleman like a broker or a website. These third-parties must be registered with the SEC and follow strict guidelines.

Startups Changing Strategies

 

The overall effect of the JOBS Act has been incredibly positive for startups. 

Companies that previously wouldn’t be able to secure funding from the traditional venture capitalists and angel investors can now take a simple route to raise funding and get things off the ground. Because of this, we have seen a surge in the startup space.

But, this new form of funding has changed the way many startups do business. 

To be successful with Regulation Crowdfunding, startups need to attract early advocates quickly and market their ideas to the masses, not just to angel investors and VCs. 

As a result, social media marketing and community-building are now an essential part of the startup lifecycle. A successful startup needs to have a community of supporters before, during, and after launch.

While this is a bit more work than what startups used to do, in the long run, it pays off. Startups that go the Regulation Crowdfunding route can easily form a community around the dozens, hundreds, or thousands of early backers. These investors are not only supporters, but customers, and advocates. 

This is one reason I invest so much in Regulation Crowdfunded startups. You can see the community they have before you invest, you don’t need to take their word for it.

The Real Winners: Angel Investors

 

The affluent angel investors of yesteryear are still free to do what they have always done. There is no shortage of startups seeking large amounts of funding from these wealthy individuals.

What has changed is the barrier to entry and the total number of people investing in startups.

Because of the JOBS Act, the startup ecosystem is incredibly healthy. With a new, hungry breed of angel investors out there, more great ideas are able to get the funding they need to go from genesis to exit. 

This rise in entrepreneurship attracts more investors, and an ebb and flow of prosperity ensue.

To learn more about the opportunities in angel investing and real strategies to grow your wealth, claim your copy of my brand new ebook, Startup Investor’s Playbook, completely free.


Leave a Reply

Your email address will not be published. Required fields are marked *

Get an inside look at the latest startup trends and opportunities.