The Internet has become an inexpensive and easy way for individuals and businesses to raise money for their activities. Congress recently passed the JOBS Act, which directs the Securities and Exchange Commission (SEC) to create rules exempting crowdfunding from the securities registration laws. Once implemented, these rules will remove restrictions on start-up companies seeking investors over the Internet. Investors should be on the lookout for unscrupulous issuers and intermediaries who may attempt to engage in crowdfunding before the rules are written or misuse crowdfunding to steal from investors through false and misleading representations.
What is Crowdfunding?
Crowdfunding is an online money-raising strategy that began as a way for the public to donate small amounts of money, often through social networking websites, to help artists, musicians, filmmakers and other creative people finance their projects. The concept has recently been promoted as a way of assisting small businesses and startups looking for investment capital to help get their business ventures off the ground. Traditionally, investment opportunities are offered by professionals, such as brokerdealer firms and investment advisers, who must recommend investments that are based on their clients’ investment objectives and levels of sophistication. Through crowdfunding, individuals are able to invest in entrepreneurial start-ups through an intermediary, such as a broker-dealer or a “funding portal.” By law, “funding portals” are not allowed to provide investment advice.
What is a funding portal?
A funding portal is a website, also called a “platform,” that advertises the investment opportunities and facilitates the payment from the investor to the issuer. Some portals advertise a variety of investment opportunities on one website, allowing the investor to select one or more projects in which to invest.
How Crowdfunding Works
Joe’s small business sells goat cheese made from his special pygmy goats. To keep his business afloat or to help it grow, Joe can turn to the Internet to seek online donations from the public who contribute small amounts of money and expect nothing in return. Joe usually sends a sample of his cheese as a thank you for the donation; large donors might even get a cheese named in their honor.
New legislation has directed the SEC to write rules that will change how Joe can raise money online. Once the rules are written, Joe will be able to use the Internet to raise up to $1 million each year by selling investments in his company to thousands of investors. Because Joe will be issuing shares in his company in exchange for investment capital, his supporters are no longer donors; they become investors and will expect a financial return for their investment.
Why Investors Must be Extremely Cautious About Crowdfunding Investments
The Bottom Line
It pays to be skeptical of investment opportunities you learn about through the Internet. When you see an offering on the Internet – whether it is on a funding portal, in an online newsletter, on a message board or in a chat room – you should be cautious until you have done your homework and proven that it isn’t a scam.
If you have any questions about crowdfunding offerings, contact the Vermont Department of Financial Regulation at 802-828-3420 or online at www.dfr.vermont.gov.
This Informed Investor Advisory is brought to you by the Vermont Department of Financial Regulation, a member of the North American Securities Administrators Association. For more investor alerts and advisories, visit the NASAA website at www.nasaa.org.
To learn more or for help with these or other investment products, contact:
VERMONT DEPARTMENT OF FINANCIAL REGULATION
89 Main Street, Second Floor | Montpelier, VT 05620-3101
802-828-3240 | www.dfr.vermont.gov