The 4 Must-Knows for Crowdfunding Investors
Published on May 19, 2016
What is Crowdfunding?
Crowdfunding is a type of investment structure that involves raising small amounts of money through a large number of investors. It is likely that crowdfunding will become popular with self-directed retirement plan investors (as it has already proven popular with accredited investors), particularly those who want to invest with Roth IRAs. Investments in startup companies can produce large returns from small investments, but there is a risk involved with any startup investment.
4 Must-Knows for Investors
- Crowdfunding is different from Kickstarter. They are both similar in that they are raising small amounts of money through a large amount of investors, but the return to the investors is different. With Kickstarter, investors receive perks and merchandise in exchange for their assistance in funding. Crowdfunding allows investors to invest in the company’s equity, which can allow investors to make money as the company grows
- One of the benefits to crowdfunding is that is allows investors to purchase equity in startup businesses, regardless of whether they are accredited investors or not. The new rules just enacted allow for non-accredited investors to now take part in crowdfunding. An accredited investor is defined by the IRS as someone with $1M net worth (excluding the value of their residence) or a person with an annual income of $200K ($300K if you’re married). Unaccredited investors can invest between $2K and $100K a year in small companies depending upon their net worth and annual income.
- Crowdfunding investments cannot be done directly. Companies that wish to crowdfund must do so through a broker dealer or a funding portal that is registered with the Securities and Exchange Commission (SEC).
- You are restricted from reselling your shares in the first year after purchasing them unless you are transferring them to:
- The company that issued you the shares
- An accredited investor
- A family member
- In connection to your death/divorce/or similar matter
- To a trust controlled by you or a trust for the benefit of a family member
- As part of an offering registered with the SEC
How to Make Crowdfunding Work for your Retirement
Do you want crowdfunding to help your retirement nest egg flourish? With the SEC opening crowdfunding to more of the public, you can invest in companies with an IRA. As the company grows, so will your IRA. You can read more about crowdfunding here or call Next Generation Trust Services at 888.857.8058.Back to Blog