Be Wary of Crowd Funding Start-Ups

Later this year, or early next year, you will have the chance to buy shares in privately held companies through a process known as crowd funding. If an offering seems interesting, tread carefully, do as much research as you can and only commit any money you can afford to lose.

Crowd funding is the process of raising money from a group of people. It is currently used for a variety of purposes, from charitable efforts to political campaigns. (Crowd funding is also called crowd financing.)

The Jumpstart Our Business Startups Act (aka the JOBS Act) will turn crowd funding into a source of venture capital. The act, which was signed into law last month, allows companies to sell shares via crowd funding. Specifically, companies can sell up to $1 million worth of shares during a 12-month period. Any investor can participate in a private equity offering as long as they don’t commit more than $2,000 or 5% of their annual income or net worth, if either annual income or net worth is less than $100,000, to a single non-publicly traded company. An investor merely has to attest that he understands the risks involved in investing in a start-up and the risks of illiquidity (strict restrictions are placed on the transfer of shares) and that he has read the investor education information.

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