Crowdfunding Rule Could Set Dangerous Precedent

Source: Forbes


If reports are true that crowdfunding companies won’t be required to do income verification of investors, that could open up the door for abuse.

Under the JOBS Act, signed into law by President Obama last year, the U.S. Securities and Exchange Commission (SEC) is writing rules that would govern how companies can raise money online.

Investors with $100,000 or less in annual income are restricted to $5,000 per company annually under the JOBS Act rule. Those with higher net worths can invest more.

What if the SEC doesn’t require that companies raising money in online equity offerings double-check the income of their less-affluent investors? Then crowdfunding could turn into a casino with more losers than winners.

In theory, crowdfunding promises to “democritize” equity offerings by making stock available to investors online. Companies could raise up to $1 million a year using this channel.

Online platforms like Kickstarter and Indiegogo have been raising money in small amounts for years for projects ranging from theatrical productions to video game start-ups.


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