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NASAA Cautions Against Crowdfunding Investments

By George Miller  of Shustak Reynolds & Partners, P.C. posted on Monday, March 25, 2013.

The North American Securities Administrators Association (NASAA) was founded in 1919 and is one of the oldest investor protection organizations in the country. NASAA routinely publishes a list of its “top investor threats.” For 2013, a rapidly growing, often risky investment vehicle referred to as “crowdfunding” was first on the list.

The Securities and Exchange Act of 1933 prohibits entities from offering or selling securities to the public unless the offering is registered with the Securites and Exchange Commission (SEC) or exempt from registration. According to NASAA, the 2012 “JOBS Act” will loosen those restrictions and significantly broaden the capital-raising methods available to startup businesses and entrepreneurs.

One such method is equity crowdfunding. Equity crowdfunding involves the use of social media and other web portals to entice the public to invest in new, often risky startup ventures. New regulations governing crowdfunding still are being implemented, but the JOBS Act generally will allow companies to raise up to $1 million per year through selling small lots of shares to ordinary investors. This type of investment previously was available only to accredited investors.

While individual investments are capped (up to $2,000 for investors whose net worth or annual income is under $100,000 and 10% for investors whose net worth or annual income exceeds $100,000), NASAA cautions that internet-based investments in small startups often are among the riskiest; securities fraud is not uncommon. And while the capped investment amounts may limit investor losses, they also make it less likely defrauded investors will bring a claim to recover those losses.

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