Raising money from family and friends is the most common form of initial-stage startup funding. Angel investors typically pass on ground-floor businesses, and bank executives won’t even allow aspiring entrepreneurs to book a meeting (picture them laughing as they hang up the phone).
That’s why more than 82 percent of startups are financed through friends and family – and it was no different at Rocket Dollar when we initiated our first round of funding. However, our initial raise showed we are at the forefront of a new and growing investment trend with the potential to reshape the way angel investments are made in early-stage businesses.
Friends and Family – and Retirement Investors: A Changing Landscape
Rocket Dollar initiated its first round of funding in April 2018, and by the end of June it had secured its target funding amount – in fact, we were oversubscribed by about 10%. A portion of our initial raise – about 10% -- came from investors who had opened Rocket Dollar accounts. Not only were these individuals Rocket Dollar’s earliest customers, they also became angel investors in the company as well. They made their investment using retirement dollars. If we’re successful there will be a nice payday for the investor’s retirement account with a substantial tax benefit.
That’s pretty unique in terms of raising capital – and it validates part of Rocket Dollar’s business model. By allowing investors to tap their retirement dollars, Rocket Dollar did better in its initial raise than if we had gone out and raised funding just the old-fashioned way. Our customers became angel investors in the company – a model that potentially could bear fruit with countless other early-stage businesses or businesses that seek additional funding for expansion.
Although the first round of funding for new businesses likely will still come from friends and family, the way those friends and family bankroll their investment has changed. Investors across the country now can use Self-Directed Solo 401(k)s or Self-Directed IRAs to tap into their retirement funds for angel or later stage investments in early or later stage companies or private businesses.
It’s an excellent way for new businesses and early-stage companies to make their early fundraising efforts more successful, and it provides increased opportunities for investors to diversify their retirement holdings with exciting opportunities that can potentially provide incredible returns if the business is successful.
It’s the beginning of a new way of fundraising – in time, practically every fundraising effort could hold some amount of retirement investment.
Facts About Angel Investing Using Retirement Accounts
There are some caveats and rules, however, of which entrepreneurs and business owners need to be aware.
Potential investors still must meet accredited investor status as defined by the Securities and Exchange Commission. Accredited investors have annual salaries exceeding $200,000 in each of the prior two years, or $300,000 for married investors. Or, they have a net worth of more than $1 million, excluding the value of their primary residence.
Although those rules still apply, Rocket Dollar makes it much easier for accredited investors to use their retirement dollars for angel investment opportunities. This preserves valuable liquidity that can be applied to other investment opportunities or for emergency situations. It also could make a huge difference in the friends and family fundraising round, just like it did with Rocket Dollar. However, the onus still is on the investment issuer to ensure all investors meet accredited investor status.
Retail investors who don’t meet that minimum threshold – and let’s face it, that’s most of us – still can participate in early-stage fundraising efforts via crowdfunding.
Using a Rocket Dollar Account for Crowdfunding Opportunities
The Jumpstart Our Business Startup Act, or JOBS Act, was instrumental in establishing provisions for early-stage and emerging-growth companies to sell securities through crowdfunding platforms, such as Kickstarter, Indiegogo, Rockethub, Crowdfunder and CrowdRise. Crowdfunding has helped countless emerging-growth business raise capital, as well as provide retail investors with an incredible and diversified array of investment opportunities.
While there have always been ways for non-accredited investors to participate in company fundraising efforts, it’s an onerous process that requires reams of paperwork. With crowdfunding, retail investors can participate in all sorts of exciting business opportunities that formerly were limited to high-net-worth individuals and accredited investors.
Crowdfunding is just one way our customers are using their Rocket Dollar self-directed retirement accounts to build a diversified portfolio of business opportunities with local businesses or friends and family who are starting businesses. They are taking advantage of the tax shelters provided by retirement account and still investing in a variety of crowdfunding deals.
For many people, retirement accounts are their biggest source of capital. Anyone can invest in crowdfunding platforms; however, there are some rules for investing through crowdfunding platforms, though, of which retail investors should be aware. There also are investment limits that are primarily based on annual income and net worth.
Rocket Dollar provides an avenue for retail investors to tap into regional opportunities and local businesses people they care about. It’s another example of how the future of retirement investing is changing and evolving. Crowdfunding has the potential to become a primary means for retail investors to access alternative deals, and they can use a Rocket Dollar Self-Directed Retirement Account for a portion of those investment funds.