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
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
Financial Service Authority
Crowdfunding: Is Your Investment Protected?
10/08/2012
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.
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.
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
