Crowdfunding investing is about to be available to the average Joe – and that means the floodgates to a whole new set of potential risks could be opened wide, predict investor protection advocates.
The Securities and Exchange Commission (SEC) voted yesterday to propose rules that, for the first time, would allow entrepreneurs and start-up companies looking for investors to solicit over the Internet from the general public.
If adopted by the SEC, the proposal would be a major change in the way in which small U.S. companies are allowed to raise money in the private securities market. Currently, private companies can solicit only from accredited, sophisticated investors who have a net worth of at least $1 million or an annual income of more than $200,000.
The proposed investment crowdfunding rule changes this scenario, giving small businesses the green light to raise up to $1 million a year by soliciting unaccredited investors.
For those investors, the new proposal is a chance to get on the ground floor of the next big investment. At the same time, however, investment crowdfunding can be extremely risky, given the fact that most start-ups never see the light of day. A recent Wall Street Journal article reported that 3 out of 4 venture-backed start-ups fail.
In addition, critics of investment crowdfunding say it will unleash a myriad of new fraud schemes, particularly among unsophisticated investors.
The SEC’s crowdfunding proposal is in response to the Jumpstart Our Business Startups (JOBS) Act, which was signed into law by President Obama last April as a way to help spur small business growth by easing federal regulations.
Last year, the North American Securities Administrators Association (NASAA) issued an advisory for investors considering crowdfunding. Among other things, the report highlighted a number of crowdfunding concerns, including offers from disreputable persons and platforms seeking to prey on entrepreneurs unfamiliar with the JOBS Act’s requirements.