Annual Amount Individuals Can Invest Under 'Crowdfunding' Law: $100,000

By Adam Freedman | April 25, 2012
  • What's Happening

    What's Happening

    Small business enthusiasts are celebrating the enactment of the Jumpstart Our Business Startups Act, promoted by the Obama administration as a way to lift the economy by making it easier for "emerging growth" companies to raise money. Provisions in the JOBS Act include an increase in the number of shareholders private companies are allowed to have and a reduction in the amount of information these companies must disclose when they issue stock. It also legalizes "crowdfunding," which allows startups to raise money over the Internet (potentially as much as $100,000 per investor per year, depending on income and assets) without going through the arduous process of registering with the Securities and Exchange Commission.

    Photograph by Andrew Harrer/Bloomberg

  • Why It Matters

    Why It Matters

    While less-onerous restrictions on small business have populist appeal, it's important to remember that when a company raises money, the business and its investors are on opposite sides of the transaction (one is selling something to the other). Recall how easy it was for technology companies to raise money in the late 1990s in a market where many investors dumped money into companies with murky business models. The lax financial-statement laws of the time led to notoriously famous failures such as Enron and WorldCom that took many investors down with them -- and led to the enactment of such investor protections as the Sarbanes-Oxley Act of 2002. Critics of the JOBS Act, including the editors at Bloomberg View, note that it repeals some of the rules designed to contain these kinds of fraud.

    Photograph by James Nielsen/Getty Images

  • What It Means for Your Portfolio

    What It Means for Your Portfolio

    Perhaps the most alluring part of the JOBS Act is its crowdfunding provision. The prospect of getting in on the ground floor of the next Facebook or Groupon is seductive, yet startups will likely use crowdfunding only if it offers better terms than they can get from a venture capital firm. That's because venture capitalists offer intangible benefits to startups, such as industry knowledge and management know-how. If startups get a better deal through crowdfunding than venture capital, the people on the other side of the transaction-- investors -- are probably getting a worse deal. Startups that use crowdfunding may well be bottom-of-the-barrel companies, or the ones that think they can get gullible investors to overpay.

    Peter DaSilva/EPA

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