Equity crowdfunding offers investors an opportunity to participate in an early-stage venture. The beauty of this style of investment offering is its inclusivity. In other words, platforms like Fundit democratize the process of investing in start-ups, enabling the average American to get in on the game.
Everyone qualifies to invest, whether you're an accredited investor or not. However, there are caveats.
As there are associated risks with equity crowdfunding, limits have been put in place on how much you can invest during a 12-month period. The limitation on how much you can invest depends on your net worth and annual income.
The SEC states that if either your annual income or your net worth is less than $107,000, then during any 12-month period, you can invest up to the greater of either $2,200 or 5% of the lesser of your annual income or net worth.
If both your annual income and your net worth is equal to or more than $107,000, then during any 12-month period, you can invest up to 10% of annual income or net worth, whichever is lesser, but not to exceed $107,000. To simplify this, the SEC has provided a helpful table to show how this works in practice.
When it comes to how much money you can invest, an important factor to bear in mind is your net worth. You can calculate it by adding up all your assets and subtracting all your liabilities. The resulting sum is your net worth.
For purposes of crowdfunding, the value of your primary residence is not included in your net worth calculation. The SEC also states that in addition, any mortgage or other loans on your home do not count as a liability up to the fair market value of your home. However, if the loan is for more than the fair market value of your home, then the loan amount that is over the fair market value counts as a liability under the net worth test.
Finally, it’s important to note that qualifying to invest is not the same as whether you should invest. Equity crowdfunding can be risky, so you should always do your due diligence before making the decision to invest.
*Nothing in this article should be considered legal or investment advice. Startup investments are always inherently risky and following the advice in this article will not necessarily reduce that risk.