Signed in April 2012 by President Barack Obama, the JOBS Act creates crowd-sourced funding (“crowdfunding”) as an industry. The act enables small businesses the opportunity to increase their ability to raise venture funds and sell small amounts of stock to many investors on a national level. Oversimplified, “crowdfunding” allows the sale of small amounts of shares to many investors through many different platforms and social media. The regulatory framework for this new investment vehicle is in development, and may not provide the same protection the public has been used to receiving.
This new investment sourcing vehicle is designed to help small businesses and startups and effectively removes many SEC rules and regulations in soliciting invest dollars. In the past many small businesses have felt they were unfairly subjected to SEC rules and regulations that were not applicable to charities and non-profit organizations. In a nutshell, previous SEC rules for private investing provided 1) strict rules regarding advertising for investors, 2) limited shareholder numbers, and 3) those looking to become potential investors in many non-publically traded businesses were required to have either an annual income larger than $200,000 or liquid net wealth totaling over $1 million. Since the JOBS Act, small businesses will be allowed to use crowdfunding, selling small amounts of shares to many investors through many different platforms and media with a murky regulatory framework.
The relatively new investment vehicle of crowdfunding allows potential fraudsters the opportunity to take relatively small amounts of money from a large number of people. Most investments that are crowdfunded do not require a minimum investment. In addition, the majority of legal requirements to become an investor in such high risk investments have also been removed and the regulatory framework for this investment device going forward is still unclear.
Back in the 1920’s, business ventures would engage the public by offering to sell stakes in new and upcoming ventures, such as transportation infrastructure or newly invented consumer goods. Eventually, the stock crash of 1929 led to new regulations and standards that changed the way business were funded, including the sale of stock. Through his support of this crowdfunding innovation, President Obama has essentially laid the groundwork for anyone and everyone to invest money in startups and small businesses. This also opens the door to many types of potential investor fraud and abuse. The SEC will provide details to regulate the debt and equity crowdfunding provisions of the bill, however at this point they are still unclear. Financial Industry Regulatory Authority (FINRA) is also planning to provide rules for member firms engaged in crowdfunding. But as usual, the investor needs to beware of deals that sound too good to be true, and be aware of new ways their investment dollars are being sought.