State and provincial securities regulators are stepping up their surveillance for possible investment fraud among a surge in crowdfunding ventures.
A task force of state and provincial securities regulators said Wednesday that the presence of online crowdfunding sites has risen sharply in recent months in anticipation of rules from the U.S. Securities and Exchange Commission (SEC) to allow small businesses and entrepreneurs to raise capital online from small investors. The possibility of allowing firms to utilize crowdfunding is also being considered by Canadian regulators, too.
For now, raising equity through crowdfunding is not legal in Canada or the United States. It has been used to raise money for everything from charity to artistic projects in the form of donations and loans, but it cannot yet be used to distribute securities. However, the so-called U.S. JOBS Act directs the SEC to make rules to allow crowdfunding in securities markets too. Those rules are expected sometime next year.
Canadian regulators are examining the so-called exempt market generally, and are considering expanding the range of allowable exemptions (which may facilitate corporate crowdfunding).
In the meantime, regulators report that crowdfunding sites are proliferating. They say an analysis of Internet domain names found nearly 8,800 domains with ‘crowdfunding’ in their name as of November 30, up from less than 900 at the beginning of the year. Of these websites, about 2,000 contained content, more than 3,700 had no content and more than 3,000 appeared to be ‘parked’ and serving as placeholders to reserve a domain name for later use or sale, they said.
“Many of these sites appear to have been formed by large credible organizations while others appear to be created by individuals that may be operating out of their basements,” said Robert Moilanen, Minnesota securities director and chair of the North American Securities Administrators Association’s Internet Fraud Investigations Project Group. “The pure volume suggests that the wave is about to overtake the dam.”
“Investors soon can expect to be inundated with crowdfunding pitches, legitimate or otherwise,” said Heath Abshure, NASAA president and Arkansas securities commissioner.
In anticipation of a slew of illegitimate pitches, NASAA created a task force on Internet fraud investigations shortly after the enactment of the JOBS Act to monitor crowdfunding and other Internet offerings. It reports that the group is currently coordinating multi-jurisdictional efforts to scan various online offering platforms for fraud, and, where authorized, will coordinate investigations into online or crowdfunded capital formation fraud.
Additionally, it reports that NASAA members are being trained in the use of an online data mining tool developed by the staff of the enforcement division of the New Brunswick Securities Commission (NBSC) to help identify potentially fraudulent websites.
The task force also is working with NASAA’s investor education section to develop investor and industry awareness programs regarding crowdfunding.
“NASAA is promoting a proactive approach to identify problematic websites, rapidly share information about those websites with appropriate state and provincial securities regulators and engage in a prompt, meaningful and coordinated education and enforcement response,” Abshure said. “Cooperation among NASAA members is a critical component to addressing unregistered crowdfunding sites or registered crowdfunding sites that are engaged in illegal activities nationwide.”