A. Before May 16, 2016, businesses are not permitted to sell shares to individuals without registering with the SEC or having publicly traded stocks.
Private companies have been offering rewards, such as new products, to individuals via crowdfunding websites, or take loans, from online crowdfunding lenders. But generally it is illegal for private companies to advertise equity offering or sell shares to the public.
JOBS Act
The Jumpstart Our Business Startups Act (JOBS Act) will change all of that! Its final rules will be enacted on May 16 and give small investors a chance to become venture capitalists!
Two Investor Classes
The key reason for regulations is to protect small investors from scams. Small investors will be divided into two classes with different allowed investments in private companies.
- People who make more than $100,000 a year and have a net worth over $100,000: investors in this class will be allowed to invest up to 10% of the lesser or their annual income or net worth, with a ceiling of $100,000.
- People not in the above class: can invest to the larger of $2,000, or up to 5% of their annual income or net worth, whichever is less.
Why do you want to invest like a venture capitalist? We will analyze several reasons in our next blogpost.