I was “carded” recently outside a swanky club in downtown NYC.
It was a 30-second inconvenience. And, frankly, at my age, having to prove that I’m 21 just makes me smile.
But I got “carded” in a different way a few days later – and this time it was a hassle:
I was on an equity crowdfunding platform, ready to make an investment in a start-up. I was excited. The financing round was filling up fast. Time was pressing.
But when I clicked “Invest,” a new screen popped up…
I was informed that, before my investment could be completed, I had to prove that I had a certain level of net worth or income – i.e., that I was an “Accredited Investor.”
Tedious and time-consuming paperwork ensued…
But this isn’t some inconvenience that affects just me. If you’re getting ready to make equity crowdfunding investments, this will affect you, too.
Recently, however, I learned about the one simple step you can take to make the hassle go away.
And today I’m going to tell you about it…
Historically, private companies couldn’t advertise that they were accepting new investors. They were legally prohibited from doing so.
You had to move in certain circles to hear about these opportunities. And to participate, you needed to certify that you were an “Accredited” investor – i.e., that you had at least $200k in annual income ($300K combined with your spouse), or net assets over $1 million.
But if you did hear about such a deal and decided to invest, you could self-certify that you were accredited. You’d take out your pen and put an “x” next to a little box in the legal documents. That’s it. That’s all the proof the SEC required.
As of September 2013, private companies can tell the world (on TV, radio, Facebook, etc.) that they’re accepting new investors. This is one of the most exciting changes to financial regulation in 80 years.
In exchange for this new openness, the SEC put up some roadblocks in order to protect investors. One such roadblock requires companies to take “reasonable steps” to verify that investors are accredited. Self-certification will no longer suffice.
Going through this verification process once isn’t too bad. But going through it for every investment you make is frustrating. (Remember: to be properly diversified, you should be building a portfolio of start-ups – at least 25 of them over time!)
AngelList is one of the high-quality platforms we use.
As if they heard my complaint loud-and-clear – actually, plenty of other folks started complaining, too – they created a free service called Accreditation Reports.
Here’s how it works:
You provide AngelList with a few documents of your choice – brokerage statements, for example, or a letter from your lawyer or accountant – to prove that you’re accredited. Once they’ve accepted your documents, they’ll provide you with an online Accreditation Report you can privately share with anyone you choose.
It’s compliant with the SEC’s demands about proof, and you can use it for any type of investment, regardless of where you discover the opportunity. Basically, it’s a universal standard for accreditation.
Other options for accreditation are popping up – from Accredify to SecondMarket to SeedInvest – but given AngelList’s clout in the early-stage investing market (and the free price tag), they might be hard to beat.
For those of you who don’t currently fit the income or net worth requirements to be accredited, heads up that some historic changes are in the works…
Later this year, the SEC is planning to change the rules about who can invest in start-ups. As the proposed rules look now, any citizen will be able to invest – regardless of income or wealth.
Will there be paperwork involved? Yes. Probably lots of it…
But hopefully AngelList will build a hassle-free solution for you, too.
for The Daily Reckoning
Ed. Note: Matt and his partner Wayne Mulligan have been following the crowdfunding space very closely and have become regular fixtures in the Tomorrow in Review email edition – whose readers are keenly aware of the opportunities crowdfunding presents. As a result, Tomorrow in Review readers may already have a plan in place to maximize their profit potential when the big news on crowdfunding finally breaks. So don’t wait. Sign up for the FREE Tomorrow in Review, right here.
Investing in startup companies is no sure thing. Most of the startups out there will probably lose money. But if you cast a wide enough net over these investments, they could pay off handsomely. Today, Wayne Mulligan describes the first of many of these startups whose IPO comes on the heals of equity crowdfunding...
Matthew Milner is a Media & Technology executive. After selling a tech company he founded to Hearst in 2008, he joined Hearst Digital’s senior management team, first launching their brands online, then acting as their Entrepreneur-in-Residence. Matthew is founder of Crowdability, a free platform that aggregates investment opportunities in private-equity crowdfunding from across the web directly to you.
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