Usually, the only things I review are actual products, but today’s review is a little bit different. This review involves the Securities and Exchange Commission (SEC) and its adoption of rules involving crowdfunding and the selling of securities via this method.
What is Crowdfunding?
In case you are unfamiliar with the term, crowdfunding is a method of raising money through the Internet. Crowdfunding is used by individuals for a variety of reasons.
One purpose could be to raise money to put a product into development or production. It could also be used by individuals in dire need, whereby individuals could donate to help a person pay for expenses.
What is Regulation Crowdfunding?
Regulation Crowdfunding is just part of proposed amendments to certain rules involving the selling of securities by companies. Part of the JOBS Act was to amend certain rules put in place by the SEC.
These amendments would allow companies to sell securities through the crowdfunding method. Although this could be a matter of concern for many people (and for a good reason), there are quite a few regulations in place for both buyers and sellers of securities, along with the portals through which these transactions take place.
Rules for Sellers
- Some of the rules for sellers of securities are as follows:
- Sellers must provide the prices of the securities being sold.
- Sellers must provide their company’s financial status.
- Sellers must provide financial statements to investors.
- Sellers must provide this information to the SEC and the entity that provides the medium for crowdfunding services.
Rules for Investors
Investors have certain regulations as well, mostly in place to protect them from fraud or substantial losses. This is mostly in the form of a limitation as to how much they can invest in a 12-month period. The amount allowed to be invested is based on income.
Regardless of income levels, an investor is limited to an investment of $100,000 for a 12-month period.
Rules for Funding Portals
Funding portals are the regulated, registered intermediaries through which securities crowdfunding takes place. Some of the requirements of these portals are:
- Inform investors on how the process works as well as the offered securities.
- Ensure companies using their portal are in good standing and keep proper records to use their portal.
- Post all required disclosure information from the seller to the public at least 3 weeks before the securities begin selling.
- Allow for communication about all offerings available via the portal.
- Require investors to create and open an account before making any transactions.
- Portals are ineligible from participating in the purchasing of securities by any company that uses that portal.
- Comply with any rules and regulations set forth by the SEC to operate or continue operating.
My Assessment and Conclusion
Investors rightly should be concerned about buying securities through crowdfunding, but the rules and proposed amendments set forth by the SEC seem to have all the bases covered, thereby eliminating the majority of fraudulent actions by a company or portal and offering more than reasonable protections to investors.
Since crowdfunding is a popular method of buying and investing, there is no foreseeable good reason why the selling of securities should not take place in this way.
The requirements of each party listed in the sections above are not all the requirements set forth by the SEC. For full information on what sellers, investors, and portals are required to do and are limited by, please click here to be directed to the SEC web page regarding this matter.