NASAA Warns of Potential Dangers of Crowdfunding Investment Opportunities

WASHINGTON, D.C. (May 15, 2012) – The North American Securities Administrators Association (NASAA) today issued an advisory warning investors to approach crowdfunding investment opportunities with great caution. The advisory is on NASAA’s website here.

Crowdfunding is an online money-raising strategy that began as a way for the public to donate small amounts of money, often through social networking websites, to help artists, musicians, filmmakers and other creative people finance their projects. Through the Jumpstart Our Business Startups (JOBS) Act, small businesses and entrepreneurs will be able to tap into the “crowd” in search of investments to finance their business ventures.

“Because the potential for fraud is significant, investors must be extremely cautious about crowdfunding investments,” said Jack E. Herstein, NASAA president and assistant director of the Nebraska Department of Banking & Finance Bureau of Securities.

Congress enacted the JOBS Act last month and directed the Securities and Exchange Commission (SEC) to adopt rules within 270 days to implement a new exemption to allow crowdfunding. Until the rules are adopted, “any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws,” according to a recent SEC release.

“Before the SEC rules are adopted, investors should beware of promoters who jump the gun by offering investments through crowdfunding now,” Herstein said. “Once exempt, crowdfunding investments will not be reviewed by regulators before they are offered to the public, nor will they be required to provide the same level of disclosures to investors or regulators required of securities offerings. Investors will need to prepare themselves to be bombarded with all manner of offerings and sales pitches.”

Herstein said Congress created a similar investor trap in 1996 with the passage of the National Securities Markets Improvement Act (NSMIA), which prohibited states from reviewing private offerings made under SEC Regulation D Rule 506 before they were sold to the public.

“Since NSMIA, the provisions of Rule 506 and other limited or private offering provisions have been used – and continue to be used – by unscrupulous promoters to fleece investors,” Herstein said, noting that state enforcement records show these offerings to be the most frequent source of enforcement cases handled by state securities regulators.

 “If history is any guide, investors can expect a similar experience with crowdfunding investments,” Herstein said. “We hope to limit the damage by raising awareness among investors of the potential pitfalls of investing through crowdfunding.”

Herstein also announced that NASAA has created a new task force to focus on Internet fraud. The Internet Fraud Investigations Project Group, within NASAA’s Enforcement Section, was formed to monitor crowdfunding and other Internet offerings. The task force is chaired by Minnesota Securities Director Robert Moilanen.

Investors with questions about crowdfunding offerings should contact their state or provincial securities regulator before investing. Contact information is available on the NASAA website here.

– NASAA –

For more information:
Bob Webster, Director of Communications
202-737-0900 

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