You may have seen – or even have contributed to – one of the many online portals that have popped up over the last several years asking for your money to help launch a project off the ground. The idea of contributing a portion of your income to help an idea become a reality is known as “crowdfunding.” While traditional models of raising money typically involve a venture capital firm or a private investor, crowdfunding investing offers a host of benefits for investors.
Three Things to Know When Crowdfunding Investing
So what are the risks? Title III of the JOBS Act and new legislation allows non-accredited investors to invest small amounts into private companies online while mitigating risk. Below are three things to keep in mind when it comes to investing in crowdfunding:
Equity Crowdfunding is Well Regulated
Crowdfunding portals are required to register with the Securities & Exchange Commission (SEC), which means a host of financial documents must be filed and verified before any investments are received.
Companies must also receive the license of a broker-dealer (and follow the rules that come along with that) and are restricted to raising less than $1 million per year.
Additionally, the Senate has added several disclosure and registration requirements to make it harder for scammers to commit fraud through equity crowdfunding.
The Risks are Limited
Equity crowdfunding laws limit private investments to 5% for individuals with an income of less than $100,000 and 10% for those who make more than that. In doing so, Congress has attempted to minimize the potential for fraud by preventing someone from investing their life savings in a single crowdfunding venture.
Fraud Has Not Been a Factor
Several other countries have their own version of equity-based crowdfunding and there has yet to be a case of fraud associated with it. Because of regulations in the host countries, the impact of fraud by any would-be scammers has been minimized.
As with any investment, you should always be aware of the potential risks involved before you invest. Be sure to gather as much information as possible, ask as many questions as you can and get a second opinion before investing in anything, including inventions, projects or concepts that are on crowdfunding platforms.
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With offices throughout South Florida our securities lawyers have helped investment fraud victims throughout Coral Gables, Brickell, Fort Lauderdale and Hollywood, and recovered over $100 million from banks and brokerages firms for their wrongful actions.