Securities regulators are warning small businesses and entrepreneurs to be cautious about the risks of using crowdfunding to finance their ventures.
The North American Securities Administrators Association (NASAA) issued an advisory Wednesday to highlight concerns for firms seeking to raise investment capital through crowdfunding, which involves raising relatively small amounts from a large number of investors with minimal oversight.
In the past, this has been a technique used by artists to help fund creative projects, but new US legislation directs the US Securities and Exchange Commission (SEC) to create a new prospectus exemption to allow businesses to use this method, too. State securities regulators opposed this move, suggesting that it will expose investors to a greater risk of investment fraud. Now, NASAA is also warning small businesses about the risks they face, too.
The advisory reminds firms to wait until the SEC’s crowdfunding rules are finalized before offering shares for sale to the public. “Until that time, federal and state securities law prohibitions remain in place against publicly accessible Internet securities offerings,” the advisory says.
It also stresses that crowdfunding equity offerings will only be exempted from registration requirements, they will still have to comply with other securities rules. “The requirements of federal and state securities laws regarding disclosures, including disclosures of all material facts and risks to investors, remains in place,” the advisory says. “If you do not comply with these disclosure requirements, you and your business can be liable for securities fraud and subject to private lawsuits as well as administrative enforcement actions.”
Additionally, the advisory highlights the importance of choosing a proper broker, or funding portal, to assist with a crowdfunding offering; and, it reminds firms that there are other ways for companies to raise money from a limited number of investors with little or no cost.
“Small businesses are important to the nation’s economic growth and the crowdfunding concept has the potential to provide legitimate small, innovative enterprises with access to capital that might not otherwise be available,” said Jack Herstein, NASAA president and assistant director of the Nebraska Department of Banking & Finance Bureau of Securities.
“Through our advisory, state securities regulators want to help ensure that both small businesses and investors are protected as they explore the crowdfunding marketplace,” he said.