SEC stalls in issuing new regulations for small investors

Miami readers may have heard about a new investing trend called crowd funding, but might be unsure what it is. The term refers to the online pooling of small investment contributions, perhaps as little as $100 per investor.

The Jumpstart Our Business Startups Act, commonly referred to as the Jobs Act, made the trend possible. President Obama signed the Act into law last spring. Lawmakers hoped that the law would stimulate the economy and spur job growth by relaxing certain securities regulations for small businesses seeking investment capital.

Specifically, the law permits small businesses to raise up to $1 million by offering ownership shares to investors online. In addition, the law requires only limited financial disclosures from such small businesses and startups. That, in turn, may limit the potential legal exposure of the companies, in the event disappointed investors allege misrepresentation or securities fraud.

However, the ease of making investment contributions online has some securities fraud attorneys and enforcement officials worried. Without the procedural protections applicable to larger corporations, first time or inexperienced investors might be susceptible to misreading information and mistaken assumptions. Indeed, many small businesses and startup companies have a high failure rate. Those concerns may explain why the U.S. Securities and Exchange Commission has failed to yet promulgate new regulations about crowdfunding.

In the absence of federal regulations about crowdfunding, several states are proposing action that would make this trading activity legal within their jurisdictions. Although crowdfunding may attract a less sophisticated investor, those individuals may have the same concerns about the integrity of company statements as shared by higher stakes investors. In that regard, a consultation with a securities fraud attorney may be helpful.

Source: washingtonpost.com, “‘Crowdfunding’ trend poised to make mark on U.S. investing landscape,” Dina ElBoghdady, April 29, 2013

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