So You Want To Be A Venture Capitalist?

Today, The Juice kicks off what will be an ongoing series on alternative investing. 

Because as much as we love the big names in today’s Trackstar top five, speculating on meme stocks and, even, looking at cryptocurrency. Doing this and owning a few ETFs isn’t necessarily diversification. At least not across assets. 

While you don’t absolutely have to branch out, if you want to, you have more options at your disposal than ever before. You can invest in everything from wine to fine art and real estate to private companies without having to put forward a ton of cash. In fact, some platforms let you get started with less money than it requires to buy one share of Nvidia (NVDA). Even after the split. 

We’ll get platform and idea specific in future installments, but, today, we want to cover what has made so much of this, particularly crowdfunding and private equity investing for smaller investors, accessible to the masses. If you want to be a mini-venture capitalist, it has never been easier. 

The old model looked like this: The rich continued to get richer by restricting the possibility of the not-so-rich from even sniffing venture capital. While the rich continue to get richer, the playing field has, at least, been leveled. It’s a little less lopsided. This is a big victory, especially if you’re a young or otherwise savvy investor looking to broaden your horizons. 

However, it’s not just a win for the general investing public. It’s a win for businesses as well. 

Not every company has the capital and other resources necessary to get listed on an exchange or attract and secure venture capital via the traditional routes. Crowdfunding, made possible by the government regulations we’re about to detail, lets businesses, typically small startups, bring in cash to fund their endeavors and grow their businesses. 

What Are Regulations A and CF?

There’s a good chance that if you invest in a private company (often a startup) online, you’ll be able to do it because of one of these regulations. Regulations A and CF give non-accredited investors a route to, essentially, be a venture capitalist. While you might not have as much (or any!) say in how the companies you invest in operate as a traditional VC, you can (ideally) participate in the long-term growth. Of course, the growth cycle of a startup can be slow — and many fail — but, as with any investment, you just need to know the risks going in. 

For private companies, Regulations A and CF removed considerable from fundraising. They made it easier for companies to accept investments from the general public. It effectively kickstarted (no pun intended) equity crowdfunding. 

In the old days, only accredited investors could invest in the private market. 

An accredited investor, according to the Securities and Exchange Commission (SEC), is an individual who made $200,000 or more in each of the last two years, and expects to do so in the present year. When including a spouse, that number is $300,000. If you have a net worth (excluding your private dwelling) of more than $1 million as an individual or in conjunction with a spouse, you can also be an accredited investor. You also qualify, in certain instances, if you’re a financial professional and hold a Series 7, Series 65, or Series 82 license.

Regulations A and CF opened private equity investing up to non-accredited investors, aka, the rest of us. The so-called little guys. 

Let’s start with the primary rules around Regulation A, via the SEC:

Regulation A has two offering tiers: Tier 1, for offerings of up to $20 million in a 12-month period; and Tier 2, for offerings of up to $75 million in a 12-month period. For offerings of up to $20 million, companies can elect to proceed under the requirements for either Tier 1 or Tier 2.

For a Tier 1 offering, there are no limits on if or how much you can invest. 

For a Tier 2 offering, if you’re a non-accredited investor, the SEC says you can invest “no more than 10% of the greater of the person’s, alone or together with a spouse, annual income or net worth (excluding the value of the person’s primary residence and any loans secured by the residence (up to the value of the residence)).”

Regulation CF is similar to Regulation A with a few key differences, via the SEC:

• “require all transactions under Regulation Crowdfunding to take place online through an SEC-registered intermediary, either a broker-dealer or a funding portal”
• “permit a company to raise a maximum aggregate amount of $5 million through crowdfunding offerings in a 12-month period”
• “limit the amount individual non-accredited investors can invest across all crowdfunding offerings in a 12-month period”
• “require disclosure of information in filings with the Commission and to investors and the intermediary facilitating the offering” 

The SEC also notes that there is typically a one-year restriction on being able to sell securities purchased via crowdfunding. 

The Bottom Line: Funding portals. In the next installment of this ongoing series about alternative investing, we’ll discuss some of the platforms you can use to invest in private companies. From there, we’ll expand the scope into other alternatives, such as wine, fine art and real estate. 

If you’d like us to cover something else or something specific (or if you have anything else to say) please use the feedback link at the bottom of this page to get in touch with The Juice.

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