Is it legal to invest in startups? What you need to know in 2019
Startups can be a lucrative investment, however you first need to determine if it is legal for you to invest.
The History of Startup Investing
Yes it is legal to invest in startups. Modern day startup investing is a relatively new opportunity. Before 2016, investing in risky assets like startups was only available to very wealthy individuals. The original reason for only allowing the wealthy to invest was to protect investors. These laws were made in the 1930’s after the great depression. In theory these laws were to prevent and reduce the sale of fraudulent securities. In modern times a government entity called the Securities and Exchange Commission or SEC oversees companies raising money.
In 2016 the JOBS act was passed to open up the restrictions set in place in the 1930’s. Now companies can raise money from the general population through equity crowdfunding. It’s not as easy as it used to be though, there are a multitude of regulations every single company fundraising has to follow. These regulations help to greatly reduce the amount of fraud, and make startup investing safer across the board.
How to know if an investment opportunity is legitimate
Before you go and search for a company you should understand how to find real ones that won’t defraud you. Startups looking for investment must be raising money through an SEC regulated platform. Before you make an investment double check that the SEC has authorized the platform to take money from investors. Keep in mind Startup investing is only legal if you go through properly registered platforms.
Location and Amount
Sometimes depending on your location it may be illegal for you to invest in a startup. Some startups may restrict non U.S. residents from investing, and may also require that you be in a certain State. This means before you make any investment read over the offering details, it is key to make sure you do not live in a state that is restricted.
The amount you are allowed to invest is also restricted. The maximum you are allowed to invest is determined by your income and the amount of assets you own. To see how much you are allowed to invest you can check on our calculator. Make sure to not invest more than you are legally allowed to.
Taxes and Reporting
Since startup investing has just been opened up to the general public, the tax implications and reporting information has not been standardized. You should speak to a professional accountant to determine what you owe and how to pay it.
This article is not meant to be legal advice, we are not lawyers and we can’t guarantee the legality or authenticity of any investment. It is up to you as an investor to make sure your investments are legitimate. Startup investing has been made widely available thanks to equity crowdfunding and the JOBS act. The SEC has defined regulation and legalized it. However whether or not it is legal for you to make a startup investment depends on the company.