Olympia – The Washington State Department of Financial Institutions issued an advisory today warning investors to approach crowdfunding investment opportunities with great caution.
Crowdfunding is an online money-raising strategy that began as a way for the public to donate small amounts of money, often through social networking websites, to help artists, musicians, filmmakers and other creative people finance their projects. Through the Jumpstart Our Business Startups (JOBS) Act, small businesses and entrepreneurs will be able to tap into the “crowd” in search of investments to finance their business ventures.
Congress enacted the JOBS Act last month and directed the Securities and Exchange Commission (SEC) to adopt rules to implement a new exemption to allow crowdfunding. Until the rules are adopted, “any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws,” according to a recent SEC release.
“Before the SEC rules are adopted, investors should beware of promoters who jump the gun by offering investments through crowdfunding now,” DFI Securities Division Director Bill Beatty said. “Once exempt, crowdfunding investments will not be reviewed by regulators before they are offered to the public. Investors will need to be vigilant to protect themselves.”
Beatty said Congress created a similar situation in 1996 with the passage of the National Securities Markets Improvement Act (NSMIA), which also prohibited states from reviewing offerings made under SEC Regulation D Rule 506 before they were sold to the public.
“Since NSMIA, the provisions of Rule 506 and other limited or private offering provisions have been used – and continue to be used – by unscrupulous promoters to fleece investors,” Beatty said, noting that the North American Securities Administrators Association (NASAA), of which Washington DFI is a member, reports these offerings to be a frequent source of enforcement cases handled by state securities regulators.
“If history is any guide, investors may have a similar experience with crowdfunding investments,” DFI Director Scott Jarvis said. “We hope to limit the damage by raising awareness among investors of the potential pitfalls of investing through crowdfunding.”
Jarvis added that NASAA has created a new task force to focus on Internet fraud. The Internet Fraud Investigations Project Group was formed to monitor crowdfunding and other Internet offerings.
Investors with questions about crowdfunding offerings should contact the DFI Securities Division — before investing — at www.dfi.wa.gov or 360.902.8760.