Sunday, November 24, 2013

The JOBS Act and what it could mean for you

Hi, Mr Y here. I was recently looking for some new investments to add to my existing portfolio, and came across something very interesting. The JOBS Act. The actual document is thousands of pages long. But here is a brief background, so here it goes.

The Jumpstart Our Businesses and Startups Act (JOBS Act) is a new law that makes funding more available for small businesses and startups by easing certain regulations. Previously, only accredited investors (people with more than 1 million net worth minus their residence or individuals making more than 200k a year (300k with a spouse)) could invest in startups and other alternative investments. These startups and other investments are typically very risky, but can yield extremely high returns. So, as the JOBS Act passed in September of this year, what does this mean for you, the average investor?

You now have access to all sorts of cool, alternative investments. Because there is a certain level of risk involved, there are limits on how much you can invest depending on your income or net worth. The limits are $2,000 or 5% (whichever is greater) for people earning (or worth) up to $100,000, and $100,000 or 10% (whichever is less) for people earning (or worth) $100,000 or more. This allows you to diversity your investments into startups, commercial restate, and even individuals. Let's take a look at some below.

AngelList - this is the place to find information on startups. You can join a syndicate, which is a group led by an angel or a fund, and you can invest alongside angel investors and get a percentage of the fund's carry, aka profit. This is extremely risky because not all startups are successful (like Facebook or Twitter), and many do fail, so invest in your own risk.

CircleUp - invest in small, private businesses. Your investment typically gets you some preferred shares of stock/ownership in the company. Because these are private companies, your investment is illiquid. However, if the company does pay a dividend or gets sold, you will get your return in investment based on your ownership. This is another extremely risky investment, as many small businesses go out of business in the U.S. go out of business each year. Do your due diligence before investing.  

RealCrowd - commercial real estate crowdfunding. Typically these deals are so huge, individual investors cannot afford to take part, but crowdfunding these deals changes everything. You can be an owner of an office building in San Francisco, or maybe even a casino in Vegas. You get rental income cash flow without having to deal with all the complicated paper work and working directly with tenants. This is also better than REITs because it's more transparent and it removes the management company so you pay less fees.

Upstart - invest in the future of people. This is a really interesting idea where you can fund somebody's idea or education, and in return you get a portion of their income over 5 or 10 years. This is similar to students getting a crowdfunded loan. If they don't get a job after they graduate, then there is no income to pay back to the investors, so you could lose money that way. That's better than a standard loan, because they have to pay it back whether they have a job or not, but here, if they fail, they don't pay anything back.

So these are just some alternative investments available to accredited investors, but normal people won't be able to get into these things probably until the middle of next year. I think this is exciting because I can finally invest in things that aren't boring like stocks or loans. The risks are definitely higher, but the returns are way better.

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