As many readers may know, “crowdfunding” is a modern innovation for raising money. Typically using internet sites like Indiegogo, Kickstarter, or GoFundMe, a person can set up a website to raise money to develop a product or initiate some kind of project. Projects funded through crowdfunding range the gamut from feature films to video games to new styles of clothing. Virtually any project can be funded through crowdfunding. In return, “investors” will get some small benefit, like early access to the feature film.
As of this week, new SEC regulations have been put in place to allow the sale of securities in small business through crowdfunding. This securities crowdfunding will be overseen and regulated by FINRA.
According to FINRA, anyone can invest in crowdfunded securities, but the amount one can invest depends on an individual’s income and net worth. For instance, if your annual income or your net worth is less than $100,000, then you can invest a maximum of $2,000, or 5% of either your income or net worth (whichever is greater). If, however, your annual income and your net worth are both over $100,000, then you can invest up to 10% of your annual income or net worth (whichever is greater). The total amount invested in crowdfunded securities can never exceed $100,000.
To invest in crowdfunded securities, you must do so through a registered broker-dealer or a “funding portal,” which is a new kind of platform designed for selling crowdfunded securities. Funding portals are all registered with the SEC and regulated by FINRA. To get more information about funding portals that are currently registered, click here. Note that you cannot purchase crowdfunded securities directly from the small business; all transactions must be placed through a FINRA-regulated entity.
SEC regulations require companies issuing securities through crowdfunding to provide certain disclosures, including a description of the business and a business plan; a disclosure of any potential risks; a statement of the company’s financial condition; the names of the principals and any major shareholders; and the method for determining share price. Also, depending on the amount of money the company is seeking to raise, you may also be entitled to receive financial statements or audit reports.
While we would never say that a crowdfunded security is always a bad investment, it may not be suitable for everyone. Any investment in a small business is going to carry a substantial risk that if the business fails, you could lose your entire investment. Before investing in a crowdfunded security, make sure you are prepared for that outcome.
Also recognize that a security offered through a FINRA-regulated funding portal can still be fraudulent. Do some research on the company before making any substantial investment to make sure it appears legitimate. If you follow our blog, you know that fraud on investors is rampant, so always be aware of red flags before making any investment – crowdfunded or not.