If you’ve always dreamed of being Mr. Wonderful from “Shark Tank,” now is your chance.
Starting Monday, new rules will permit anyone, not just the moneyed, to risk $2,000 a year or more investing in small companies in exchange for a stake in the business. Companies can raise up to $1 million a year this way.
This change, years in the making, represents an enormous shift, one that essentially permits anyone to become a venture capitalist — with all the attendant risks of losing one’s shirt on a company that fails. Until now, only accredited investors, meaning those with an annual income of at least $200,000 or a net worth of at least $1 million, have been permitted to take equity stakes in most private companies. The wealthy “sharks” of the ABC reality television series got to risk their money, while the rest of us watched the action from the couch.
It is also an opportunity for start-ups and other small businesses, which can raise money with fairly few regulatory burdens. For instance, small companies seeking less than $500,000 and most first-time issuers will not need to provide audited financial statements, just unaudited ones.
So today is the day. The change could really help remove the regulatory hurdles of some small businesses that have been trying to get fresh funding from friends and family that aren't in the top 5% income earners. My fear though is in perpetuating the notion that venture capitalism is some easy/risk free investment reserved for the elite. There's a reason venture firms have money in multiple hundred investments of which the majority fail to ever return a penny of the money invested. My worry is the average Joe or Jane will pick a couple companies they think are wins and put money there before investing in a safer bets like their 401k, diversified mutual funds or index funds.
$2,000 USD doesn't seem like a ton of money at first but over a 30 year career it can be a ton of money. Just see this calculator on bankrate.com here - $2,000 USD invested in the S&P index fund in 1980 would be worth $52,976.08 in 2010. Chew on that next time you go to give your friend money for their latest and greatest idea.