Crowdfunding Rule Could Set Dangerous Precedent

From Forbes

If reports are true that crowdfunding companies won’t be required to do income verification of investors, that could open up the door for abuse.

Under the JOBS Act, signed into law by President Obama last year, the U.S. Securities and Exchange Commission (SEC) is writing rules that would govern how companies can raise money online.

Investors with $100,000 or less in annual income are restricted to $5,000 per company annually under the JOBS Act rule. Those with higher net worths can invest more.

What if the SEC doesn’t require that companies raising money in online equity offerings double-check the income of their less-affluent investors? Then crowdfunding could turn into a casino with more losers than winners.

In theory, crowdfunding promises to “democritize” equity offerings by making stock available to investors online. Companies could raise up to $1 million a year using this channel.

Online platforms like Kickstarter and Indiegogo have been raising money in small amounts for years for projects ranging from theatrical productions to video game start-ups.

State regulators have repeatedly warned the SEC not to put in place lax rules for crowdfunding. Last week, the North American Securities Administrators Association noted some of the perils in crowdfunding rules: the guidelines may not be tough enough on the investor protection front:

“With the roll out of rules required by the JOBS Act, investors and small business owners alike must be on heightened alert for questionable
investment offers and services,” said Andrea Seidt, NASAA President and Ohio Securities Commissioner.

Seidt said “NASAA members are concerned that the recent lifting of an 80-year-old ban on the advertising of private offerings, mandated by the JOBS Act, will lead to greater abuse by unscrupulous promoters.”

“Whether a crowdfunding portal or an accredited investor aggregator, it is important to do your due diligence and to understand that use of
an unregulated third party to provide such services does not change your obligations under federal and state securities laws,” Seidt said.

“Investors are not alone in their potential to be scammed. Using a fraudulent portal means both the business and the investor stand to lose.”

The SEC is expected to vote on proposed crowdfunding rules soon.  In the interim, avoid companies that claim offer crowdfunding services before the SEC rules are finalized.

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