Thursday, June 14, 2012

SEC Official Advises Investors to be Wary of Crowdfunding Before Implementing Regulations Are in Place

A senior SEC official cautioned investors to be wary of any crowdfunding investment opportunities that are offered before SEC regulations implementing the JOBS Act crowdfunding provisons are in place. Once they are in place, noted Lori Schock, Director of the Office of Investor Education and Advocacy, SEC staff will be issuing an Investor Bulletin that will highlight aspects of crowdfunding investing that should be kept in mind when deciding whether to invest or not. The SEC is required under the JOBS Act to have regulations in place by the end of the year. Earlier. the SEC advised that companies cannot use crowdfunding to raise funds from investors until the SEC issues these rules. The Director pleged that her Office would be diligent in watching out for fraud in this area once crowdfunding gets underway.

The SEC must first adopt regulations governing how companies can use crowdfunding to raise money from investors and set out the responsibilities of intermediaries. These rules will include what must be disclosed to prospective investors before they decide to participate.

Companies will be limited to raising $1 million in any 12-month period using crowdfunding. Companies cannot crowdfund on their own, said the official, but will have to engage an intermediary that’s registered with the SEC as a broker or funding portal. These intermediaries will be required to do some vetting of the company seeking funding.

Also, individual investors will be limited in the amount they can invest by way of crowdfunding in any 12-month period to, if your annual income or net worth is less than $100,000,  the greater of $2,000 or 5 percent of annual income or net worth, or if your annual income or net worth is more than $100,000, 10 percent of annual income or net worth up to a maximum of $100,000. When calculating net worth, said the Director, investors should not count the value of their primary residence or any loans secured by the residence (up to the value of the residence).