First Time Investors: How Much Do I Invest?!
- Young Cho – RoC Business Development
This is a question which we feel will become even more common as the SEC continues to grind out the final rules and regulations for allowing the traditionally defined, “Non-Accredited” investor to begin investing in start-up companies. But the question you should be asking yourself is, how much SHOULD I invest, rather than how much DO I invest. After putting aside money for short term expenses, many people use the remaining amount of their paycheck to either save or invest. One could argue that they are related concepts; however, it is important to understand the difference between the two.
Saving – is the process of setting aside cash, whether in your bank account or in securities that you can easily access whenever you need it. Some examples of these types of securities or accounts would be your saving accounts (banks), or a short-term certificate of deposit.
Investing – is the process of using money to buy an asset (like a real estate building) or a security (like a share of Facebook) that you think will generate a return over time. Investments in assets and securities are usually harder to access because there’s usually a process for selling the asset or a security to receive cash for the value of that same asset or security.
With the passing of the Jumpstart Our Business Startups Act (the “JOBS Act”), we are now able to invest in equity shares of start-up companies. Unlike companies that are listed on the major stock exchanges like NASDAQ and NYSE, start-up companies usually do not have a proven track record and/or a proven idea, and therefore are considered extremely risky investments. Having said that, equity crowdfunding is NOT for everyone; which brings us to the next question: “How much should I invest.” If you are not comfortable or have no knowledge of the startups’ industries, then it probably doesn’t make sense to make an investment. As mentioned above, investing is putting money in to something that you believe WILL generate a return over time, and for a company that is a part of something you don’t believe in or don’t know about, it is difficult to make this assumption.
But let’s say you come across a business plan and team that you think have a pretty good chance of success, how much do you invest? Although we are currently waiting for the legislation to be finalized, depending on your net worth and annual income, you will be limited in the amount you can invest. As it currently stands, for investors with net worth or annual income less than $100,000, they can invest $2,000 or 5% of their annual income or net worth (whichever amount is greater). For investors with annual income or net worth greater than $100,000, they can invest up to 10% of their annual income or net worth not to exceed $100,000. But, that doesn’t necessarily mean you should invest the full amount you are eligible to invest. Especially when money is involved in the transaction, you have to take a step back and look at where you stand financially. There are numerous statistics out there, but it is extremely important to remember that on average, statistically, 30%-40% of start-up companies fail. So it almost makes sense to think about your current situation and consider how much money you will be okay with losing (in the worst case scenario) and use that as the benchmark for setting aside funds for investing in equity Crowdfunding.
There will be more to come about inherent risks of crowdfunding, but when it comes to investing in anything, it is your responsibility to understand your financial situation and potential risks before you take the leap to spend your money.
Everyone’s Invested…Including Us! – RoC
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