One of the key investor protections built into the SEC’s final rules on Title III crowdfunding is the strict limitation on the amount that investors can invest in these offerings in any 12-month period. The rules as stated by the SEC are somewhat difficult to parse; the following is a brief overview of the calculation to be done for each investor:
- The limit applies across all offerings by all issuers; i.e., if an investor’s annual limit is $2,000, it can’t invest $2,000 with Issuer A and $2,000 with Issuer B (but it could do $1,000 with each).
- To calculate the figure, compare the investor’s net worth and annual income, each calculated in accordance with the rules for determining accredited investor status. The lower of those two figures is the one used for the calculation.
- If that lower figure is under $100,000, then the limit is $2,000 or 5% of the figure, whichever is greater.
- If that lower figure is equal to or greater than $100,000, then the limit is 10% of that figure, subject to a cap for all investors of $100,000 to be invested in these offerings.
I believe that those commentators who have reflexively opposed the whole crowdfunding concept, at least for non-accredited investors, do not fully appreciate the impact of this investment limit. For that significant portion of Americans who fall under the $100,000 threshold for either income or net worth, no more than $2,000 (or a somewhat higher four-figure number) can be invested in all of these offerings per year. While this amount is not insignificant for the non-wealthy, it’s not an amount that will lead to financial ruin. Keep in mind, also, that there are no rules that limit the annual amount that anyone can spend on lottery tickets, gambling or – for an investment example – sketchy public companies. The investment limits contained in the JOBS Act and elaborated on by the SEC, I think, strike the right balance between protecting non-accredited investors while giving them a reasonable opportunity to participate in small business equity markets.