PA Securities Commission Warns of Potential Dangers of Crowdfunding Investments Promoted Online
HARRISBURG, Pa., May 16, 2012 /PRNewswire-USNewswire/ -- The Pennsylvania Securities Commission (PSC) issued an advisory today warning investors to approach crowdfunding investment opportunities with great caution. The advisory is on commission website at www.psc.state.pa.us.
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 newly-enacted federal 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.
"The potential for fraud is our first concern because the new law places most crowdfunding activities beyond the reach of regulators," said Securities Commission Chairman Robert Lam. "Investors must be extremely cautious about crowdfunding because these new working capital aggregation strategies don't follow the usual investment rules."
Commissioner Steven Irwin summarized, "The way the new law was written, it's pretty much 'Buyer beware.'" He added, "It's not that we don't need new incentives to attract more investments in startup companies. It's just that the lax oversight implicit in the new law is likely to attract people trying to game the system and scam people out of their hard-earned money."
Commissioner Vincent Gastgeb said, "One of the problems with the Internet is that it's often hard to tell the good guys from the bad guys. People have to be cautious and never risk more in a blind investment than they are willing to lose."
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," Lam said. "When the new regulations are adopted, 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."
Irwin 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," Irwin said. He noted that the North American Securities Administrators Association (NASAA), of which the Pennsylvania Securities Commission is a member, reports 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," Gastgeb said. "We hope to limit the damage by raising awareness among investors of the potential pitfalls of investing through crowdfunding. That's why we've posted a special investor alert on our website explaining how crowdfunding works."
Irwin has been appointed to the states-SEC liaison committee mandated under the new JOBS Act to work on regulations implementing the crowdfunding provisions of the bill.
Investors with questions about crowdfunding offerings should contact the Pennsylvania Securities Commission before investing by calling, toll-free, 1-800-600-0007, or online at www.psc.state.pa.us.
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