May 16 marks a new era of financial opportunity as investors may now buy securities in early-stage small businesses through crowdfunding, a company's method of raising capital through limited investments from a large number of investors generally conducted over the Internet. FINRA passed several new rules in response to the SEC's Regulation Crowdfunding, which itself was a response to a provision of the JOBS Act concerning crowdfunding opportunities for early-stage businesses that now allow these companies to offer and sell securities using online crowdfunding strategies.
Investors with sufficient net worth are limited to investing no more than 10 percent of annual income or net worth (whichever is less, and not to exceed $100,000) over any 12-month period—for less wealthy investors, that figure is five percent—and may invest in crowdfunding offerings through a broker-dealer's online platform or funding portal.
FINRA points out several key considerations when it comes to crowdfunding, such as liquidity risk due to rules that limit investors' ability to resell crowdfunding investments for the first year.
FINRA Senior VP Gerri Walsh cautions, "Investing in unregistered, emerging securities carries significant risk, and investors have to beware the attraction of the shiny, new object and make an informed, rational investment decision."
Additionally, FINRA cautions that fraud is a realistic possibility for crowdfunding offerings, and fraudsters may swarm to this new field of investment opportunities, looking to capitalize on the ground floor buzz associated with investing in a startup or similarly exciting—yet unknown or unproven—company.
As FINRA indicated in its 2015 Securities Helpline for Seniors year-end report, fraud is alive and well, as are the similar issues of sales practice abuse and unsuitable recommendations. In 2013, for instance, FINRA joined with the SEC in warnings investors of dangerous e-mail "pump-and-dump" scams wherein tricksters used e-mail to solicit investments in fraudulent microchip stock schemes.
Its latest investment alert concerning crowdfunding confirms and reiterates FINRA's observation that fraud still occurs in the securities industry, and that new offerings, such as crowdfunding, are not immune from such nefarious schemes.
If you have invested with a broker or financial adviser in a security that was unsuitable or far too risky given your investment objectives and tolerances, and such improper investment or advisement has proven harmful to your financial interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.
News Release: FINRA Offers What Investors Should Know About Crowdfunding (FINRA)