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Crowdfunding: What Investors Need to Know

By George Miller of Shustak Reynolds & Partners, P.C. posted on Friday, December 6, 2013.

In April 2012, Congress enacted the “Jumpstart Our Business Startups Act”-or JOBS Act-as part of the federal government’s ongoing efforts to stimulate the economy. The Act was intended to spur small business growth by loosening decades-old rules prohibiting the solicitation and sale of private placement investments to the general public. Through the new “crowdfunding exemption” to the registration requirements of the Securities Act of 1933, Title III of the JOBS Act gives startup companies the go ahead to raise up to $1 million in investment capital per 12 month period from everyday (e.g., non-accredited) investors.

While there is no question crowdfunding will allow businesses easier access to startup capital, crowdfunding investors will not have the benefit of reviewing all the financial and other company information they otherwise would have in a traditional investment scenario. And given the fact securities crowdfunding-which the SEC considers amongst the riskiest investments available-will take place almost exclusively through the internet, investors may be more vulnerable to fraud or other misconduct.

The regulation of crowdfunding under the JOBS Act is a new and fluid area of the law. In fact, the Securities and Exchange Commission (SEC) only released its proposed crowdfunding regulations in late October of this year. Until those regulations are formally adopted-which is expected to take place shortly after the SEC’s comment period expires in January 2014-crowdfunding in the securities context will remain illegal. When crowdfunding becomes legal, however, investors should have a clear understanding of the rules and limitations governing crowdfunding before considering these inherently risky investments.

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