Investing in startup companies just got riskier
Entrepreneurs are excited about the Jumpstart Our Business Startups (JOBS) Act, which was signed into law this spring.
It was billed as a way to make it easier for new companies to get off the ground.
One of the major provisions stripped regulations that made it difficult for startup companies to raise funds, particularly from small, online investors.
This means firms now can hold out their hat to the entire Internet to raise up to $1 million in startup costs. Individual investors can drop $10,000 or 10% of their income into that hat, whichever is less.
With interest rates as low as they are today, you might be tempted to look for new ways to boost your investment portfolio.
But we don't think putting money in these startups is a good idea. It's too risky.
That's because these companies will no longer have to jump through a number of regulatory hoops in order to raise money. All they really have to do is register with a Securities and Exchange Commission-approved Internet "investing portal."
But those hoops are there for a reason -- they protect consumers from buying into a company that might not be ready to seek out investors or is so shaky that it doesn't have a shot at succeeding.
There are no SEC regulators there to say "no."
And you won't know anything about the company until it goes boom or bust since it's not required to update you on how it's doing. And if it fails, you won't know how or where your money went.
This also opens the door for fraud. People are willing to set up fake charities to con you out of money during a natural disaster. They'll be all over this.
The JOBS Act will help a lot of small companies find money to fund their ventures.
But if you're still working toward saving your first $100,000 or even $200,000 for retirement, you probably can't afford the risk with any sizable chunk of change.
Keep your money diversified, and keep socking it away into your retirement accounts.