Sonntag, 10. März 2013

Crowdfunding: The Risky Game

Crowdfunding: Risk and Disaster?


OSC considers crowdfunding, saying method may heighten ‘potential risk of fraud’

By Barbara Shecter, 12/12/14

The Ontario Securities Commission is seeking input about whether to allow some form of crowdfunding, where small contributions from a large number of investors are pooled in exchange for securities.

The idea of crowdfunding gained traction in the United States this year when president Barack Obama signed the JOBS Act.

A consultation paper released Friday by the OSC is also looking into the possibility of allowing certain investments based on investment knowledge or receiving advice from a registered adviser.

Crowdfunding would be part of the exempt market, which has traditionally been subject to less regulatory scrutiny because it does not require companies to file detailed prospectus documents before selling securities to investors. However, regulators are taking a closer look at the market segment, which is a growing component of capital-raising in Ontario. Readmore

Copyright: Financial Post 2012 

Crowdfunding: Potential Legal Disaster Waiting To Happen

by Bryan Sullivan and Stephen Ma, attorneys

The JOBS Act allows any Zuckerberg wannabe with an idea to skirt securities laws to attract equity investors. Anyone, be it an entrepreneur or corporate entity, can raise up to $1 million from investors putting in no more than $10,000 each, or no more than 10% of their income, whichever is less. That amount increases to $2 million if the crowdfunding entity supplies the “crowd” investors with audited financial statements. Under this system, a crowdfunder will not have to disclose  financial statements until it has more than 1,000 shareholders; traditional, full regulatory SEC disclosure rules kick in at 500 shareholders. Essentially, it allows startups to raise up to $50 million in an IPO without having to comply with the SEC’s full regulatory structure and related fees. Yes, you read that correctly – and we can only guess the disasters and class actions resulting from the future of crowdfunding. Read more

Copyright: FORBES 2012 

Small Businesses and the SEC

December 21, 2012

This guide reflects the views of the staff of the Division of Corporation Finance of the Securities and Exchange Commission (the “SEC”). It is not intended to express any statements of the SEC, and the SEC has neither approved nor disapproved its contents.

This guide is not a legal interpretation or statement of SEC policy, nor is it a comprehensive manual on the regulation of private securities offerings, registered public offerings or the laws and regulations applicable to small businesses. This guide is not intended to provide legal advice of the SEC or the SEC staff and is not a substitute for, and may not be relied on instead of, the federal securities laws themselves, the SEC’s regulations and forms, and the advice of knowledgeable advisors. 

This guide provides links to various statutes and rules that may lead to pages with lists of rules and regulations. Before clicking a link, please note the name or number of the rule or regulation you seek. Complete Guide

Jumpstart Our Business Startups (JOBS) Act

On April 5, 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law by President Barack Obama. The Act requires the SEC to write rules and issue studies on capital formation, disclosure and registration requirements.
Cost-effective access to capital for companies of all sizes plays a critical role in our national economy, and companies seeking access to capital should not be hindered by unnecessary or overly burdensome regulations. We look forward to hearing the public's views as we write rules that both facilitate capital formation and promote investor protection. JOBS Act

Interim Form for Funding Portals 

January 11, 2013

Jobs Act at a Glance

February 1, 2013

Crowdfunding - But Not by the Crowd

by Kristen A. Young
Mai 23, 2012

What the JOBS Act does for middle-class investors

The JOBS Act seeks to balance these risks with the potential upsides of crowdfunding by capping the allowable size of investments made by investors in Title III offerings. Specifically, the Act permits crowdfunding of private U.S. companies, provided that:

(1)   The aggregate amount of equity sold to all investors by the company does not exceed $1,000,000

(2)   The aggregate amount sold to any investor does not exceed:

a. The greater of $2,000 or 5 percent of the annual income or net worth of an investor, as applicable, if either the annual income or the net worth of the investor is less than $100,000
b. 10 percent of the annual income or net worth of an investor, as applicable, not to exceed a maximum aggregate amount sold of $100,000, if either the annual income or net worth of the investor is equal to or more than $100,000

(3)   The transaction is conducted through a regulated crowdfunding intermediary (broker or funding portal)

(4)   The company complies with certain information delivery requirements

Furthermore, nonaccredited investors seeking to participate in crowdfunding a company will need to:

(1)   Review investor-education information

(2)   Positively affirm that he or she understands that the investor is risking the loss of the entire investment and that such investor could bear such a loss

(3)   Take a quiz demonstrating an understanding of the level of risk generally applicable to investments in startups, emerging businesses, and small issuers and the risk of illiquidity

Companies will be required to make available to potential investors and the SEC certain company information, including an anticipated business plan and, most significantly, a description of the company’s financial condition, including, scaled disclosure depending on the offering amount, with offerings in excess of $500,000 requiring audited financial statements. Full text

Copyright: science progress 2012

Financial Service Authority

Crowdfunding: Is Your Investment Protected?


Crowdfunding involves a large group of people contributing money to support a business, individual or campaign. The funds raised are often used as startup capital, or may help a business expand or even avoid going bust. But how do you invest in these funds and how is your money protected? We take a look.

Crowdfunding is relatively new to the UK and the market is small, especially compared to the US. However, there is increasing interest in it as a new way for businesses and individuals to raise funds and for people to invest money.

How it works

Crowdfunding is usually arranged through an online platform, particularly specialist websites and social media.

The business or individual will explain their plans or project in a type of pitch, to try to attract contributions from as many people as possible. Investors can contribute as little as £10 in a business or project, usually with no upper limit.
Most crowdfunding platforms require a specified target to be reached during the fundraising period before the money is passed to the business or individual. This model is known as ‘all or nothing’, with contributions returned to investors if the target is not met.

However, on some platforms the business or individual can decide whether or not to return money to investors if the fundraising target is not reached. This model is known as ‘keep it all’.

Crowdfunding investors will usually receive shares in the business or project they contribute to, though some platforms instead allow for funds raised to be like presales of the goods to be produced or for contributors to receive a reward like a t-shirt or mug.

The benefits

It can be rewarding to be involved in a business or project as it develops, or to support a local initiative, friends or family.

Some crowdfunding platforms promote the potential for higher returns than generally achieved on mainstream investment products. While this may be possible in some cases, a crowdfunding investment is likely to come with greater risk and higher returns are rare. Nonetheless, crowdfunding could make up part of a diversified portfolio, especially for sophisticated investors. For businesses, crowdfunding can be a useful way to gain direct access to investors and finance that more traditional investors, venture capitalists or lenders are not prepared to offer.

The risks

Many crowdfunding opportunities are high risk and complex.There is no guarantee investors will receive a return on funds contributed to a crowdfund. In fact, investors could lose all of their money, as the majority of startup businesses fail. While you may receive a share of a business or project, dividends are rare and your investment could be diluted if more shares are issued.

It can also take considerable time for a startup business to generate a return, so investors must be prepared to wait until well into the future for a potential return.

This is especially so because most crowdfunds are illiquid, which means it can be difficult or even impossible to claim back money invested or have it converted back into cash. There is also no secondary market to sell your shares or crowdfunding investment.

Unfortunately, where money is changing hands – and especially where it is all done online – there is a risk of fraud, so investors should take care to protect themselves.

How to protect yourself

Make sure you sufficiently understand the business or project, how and when you might get a return, whether you will receive an equity share in the business and the risks involved before investing in a crowdfund. But do not invest any money you are not prepared to lose – remember that most startup businesses fail.
Find out how your money is protected if the business, project or even the crowdfunding platform collapses – in particular check whether the business has appropriate cash reserves or even insurance supporting it if it fails.

Keep in mind that almost all crowdfunds are not authorised by us and you will not have access to the Financial Ombudsman Service (FOS) or Financial Services Compensation Scheme (FSCS) if things go wrong.

Our view

We believe most crowdfunding should be targeted at sophisticated investors who know how to value a startup business, understand the risks involved and that investors could lose all of their money. We want it to be clear that investors in a crowdfund have little or no protection if the business or project fails, and that they will probably lose all their investment if it does.

We are also concerned that some firms involved in crowdfunding may be handling client money without our permission or authorisation, and therefore may not have adequate protection in place for investors.

Copyright: FSA 2012

OSC Consulation Paper Considerations For New Capital Raising Prospectus

December 14, 2012

The Consultation Paper explores and describes four concept ideas on which the OSC is seeking feedback:

  • an exemption to allow crowdfunding subject to limits for issuers and retail investors;
  • an offering memorandum exemption;
  • an exemption based on an investor’s investment knowledge; and
  • an exemption based on an investor receiving advice from a registrant.

"Given the importance of the exempt market to Ontario, this Consultation Paper is a vital step in soliciting meaningful feedback from stakeholders on concept ideas to appropriately address exempt market capital raising concerns and continue to deliver strong investor protection,” said Howard Wetston, Q.C., Chair and CEO of the OSC.

In November 2011, the Canadian Securities Administrators (CSA) initiated a review of the accredited investor and minimum amount exemptions. In June 2012, the OSC expanded on the CSA’s review, broadening the scope to consider whether new prospectus exemptions should be introduced that may assist capital raising for business enterprises, while protecting investors. The OSC continues to examine the accredited investor and minimum amount exemptions, along with the concept ideas presented in today’s Consultation Paper.

During the comment period, the OSC plans to hold public consultation sessions, conduct investor research and solicit feedback from interested stakeholders. The comment period for this Consultation Paper closes February 12, 2013. Full text

Beware of crowd-funding scams

The recent scam ‘project’ that i’m referring to on IndieGoGo was removed within 48 hours of it gaining attention over at r/Android – no doubt a fair few users reported it for being fraudulent. Without going into too much detail, the product being advertised was a clear scam; a smartphone offering technology that market leading manufacturers are nowhere near to producing. Naturally it gained no backing, but it does demonstrate how easy it can be for projects to be approved. This one was easy to spot because its proposals were so ludicrous, but one that sounds more reasonable by not being so ambitious in its offerings may not gain such widespread attention and could dupe a few early adopters.

Naturally, crowd-sourcing websites will want to do their best to keep scam products away, although the criteria for listing a product differs between each. Kickstarter has made its regulations stricter having had several projects fail on delivery and a new site called Christie Street, which hosts the Doorbot campaign that we covered earlier this month, has gone one step further when it comes to protecting buyers. Each proposed product must go through an audit conducted by the founder himself.  Read more

Copyright: clove 2013

When Kickstarter Investors Want Their Money Back

by Eric Markowitz, inc
As Neil Singh logged onto his computer one evening in March 2011 to research stands for his iPad, he never imagined he'd end up suing an entrepreneur he had never met--eventually forcing that entrepreneur into bankruptcy.

After surfing the Web for a bit, Singh, a Phoenix, Arizona insurance lawyer, inadvertently ended up on crowdfunding site Kickstarter. He stumbled onto a page promoting an iPad stand called the Hanfree. Singh wasn't familiar with Kickstarter's platform, but he liked what he saw on the screen: a stand with a flexible neck so its user could prop the iPad on any flat surface.

The page included photos of the product, and a sleek video showing the Hanfree propped in various spots around a loft apartment decorated with reclaimed wood credenzas and a designer wall clock. The language on the site appeared sanguine:

  • "For a $50 pledge you are pre-ordering Hanfree."

  • "Hanfree will be constructed from the highest quality materials and made in the United States."

  • "The limited edition Hanfree will be made in San Francisco out of sustainably forested alder, and will be numbered and signed by the designers."

The page included a picture of the early prototype and pictures of the Hanfree's creator, Seth Quest, a designer in San Francisco. Full text

Copyright: Inc 2013