For immediate release: May 16, 2016
Contact: Stephanie Fleming, (573) 526-0949
Kander Issues Investor Alert on Crowdfunding
Jefferson City, Mo. — With new Securities and Exchange Commission rules going into effect today, Secretary of State Jason Kander today issued an investor alert for Missourians considering securities-based crowdfunding.
Crowdfunding generally refers to raising money by soliciting relatively small individual investments or contributions from a large number of people. In the past, businesses raising money through crowdfunding have generally been restricted from offering ownership interests or debt in their company in exchange for funds because securities offered for sale must be registered with relevant regulators or fall under an exemption. Instead, companies have had to use fundraising sites that solicit donations.
Starting today, companies can use a crowdfunding exemption to offer and sell securities to investors. Although crowdfunding offers another way for early-stage companies to raise capital and expand their businesses, the mere use of the word crowdfunding does not mean an offering is safe or legitimate. Here are several ways to ensure you are considering a legitimate crowdfunding offering:
- Intermediary - Investors can only invest in a securities-based crowdfunding offering through a crowdfunding intermediary, either a broker-dealer or a “funding portal.” These platforms provide a central forum for the crowd to gather and consider the offerings. The intermediaries must be registered with the SEC and a member of FINRA. The list of registered funding portals will be available on FINRA’s website. Call the Securities Division toll-free at (800) 721-7996 for more information on the registration status of the intermediary.
- Limitations – While anyone can invest in a securities-based crowdfunding offering, the law limits the amount an individual can invest during any 12-month period. What limitations apply to you depends on your net worth and annual income. If the issuer/intermediary does not ask questions about your net worth and income, or doesn’t limit the amount you can invest, it probably isn’t a legal offering.
- Affirmations – In addition to limiting the amount you can invest based on net worth and income, crowdfunding intermediaries are required to ensure investors have reviewed educational materials designed to help them understand this type of investing. Intermediaries must require each investor to affirm they understand that they can lose all of their investment and that they can bear such a loss. If the website where you’re seeing the crowdfunding offering is not doing this, it likely isn’t a legal offering.
- Company Information – Companies are required to provide general information about the company, its officers and directors, its business plan, planned use for money raised from the offering, target offering amount, deadline for the offering, risks specific to the company or its business, and financial information about the company, among other things. If you have not been provided this information, it should be a red flag – call the Securities Division toll-free at (800) 721-7996.
Crowdfunding investments in early-stage companies present the possibility of a high return, but also pose certain risks. In addition to verifying that you are using a legitimate intermediary, the following are some risks to consider before making a crowdfunding investment:
- Speculative – The success of a startup or early-stage venture often relies on the development of a new product or service that may or may not find a market. Be prepared to lose your entire investment and make sure you can afford the loss.
- Limited disclosure – Companies that seek to raise money by crowdfunding are required to file certain information with the SEC, but early-stage companies might only be able to provide limited information about its business plan and operations because it doesn’t have fully developed operations or a long history. Moreover, unlike a public company that files quarterly, crowdfunding companies are only required to file information annually.
- Illiquidity – You will be limited in your ability to resell your shares for the first year and might need to hold your investment for an indefinite period of time.
- Cancellation restrictions – Once the offering period is within 48 hours of ending, you will not be able to cancel your investment commitment. However, if the company makes a material change to the offering terms or other information disclosed to you, you will be given five business days to reconfirm your investment commitment.
- Possibility of fraud – As with other investments, there is no guarantee that crowdfunding investments will be immune from fraud.
Crowdfunding offers another way for early-stage companies to raise capital and expand their businesses, but investors should be on the lookout for unscrupulous issuers and intermediaries attempting to misuse crowdfunding to steal from investors through false and misleading representations. When it comes to protecting your life’s savings, you can never be too careful.
For more information, visit www.MissouriSafeSavings.com or call 1-800-721-7996.
Visit www.sos.mo.gov to learn more about the Office of the Missouri Secretary of State.