In 1933, the Securities and Exchange Commission made it illegal for small investors to invest in private businesses through brokers or advisors. This blocked small investors from placing money into startups, small businesses, or real estate that has the potential for huge returns never found in the stock market. At the time, it was a Wild West for investors and too many small investors were losing all of their money. So the government created a threshold for someone to invest in these companies, a net worth of $1 million or income of $200,000 per year. These investors were labeled, “Accredited Investors” and the thinking was these people were more sophisticated investors and could with stand losing 100% of an investment and still be financially Ok.
This month, it becomes legal again for non-accredited investors to place money directly into startups and small businesses. So now small investors can act just like a venture capitalist. However, there is a cap on how much that non-accredited investors can invest in these businesses, up to 5% of your annual income.
If you choose to get into this investing arena, be aware that 90% of start-ups fail. So you need to be bright and lucky enough so that one of your 10 investments will perform so well it will offset the losses from all of the other failing startups. There are websites already to match investors to opportunities, some perform due diligence as well. Like any investment, there is a whole lot to learn before you can intelligently invest in any area. However, start-up investing is even more challenging because the company is normally not started or run by a professional and experienced management team.