Equity Crowdfunding: Good for Capitalism or for Fraudsters?

Companies raising capital on regulated, public stock markets must jump through all sorts of disclosure hoops intended to protect the public from fraud. When they raise capital in private markets, often for early-stage companies, they may generally tap only "accredited" investors--those who can prove they are wealthy and sophisticated enough to participate in what are inherently risky ventures.

What if you could remove both constraints, allowing issuers to offer securities to the general public without the rigorous disclosures required when "going public"?

That's partly the idea of the JOBS (Jump Start Our Business Startups) Act, signed by President Obama in April. Title III of the Act allows for "equity crowdfunding" via the Internet with minimal disclosure by the issuer. The idea is that removing regulatory barriers will allow start-ups access to capital they wouldn't otherwise get, except perhaps from deep-pocked "angel" investors.

Some say the law will generate a whole new generation of start-ups and reams of new jobs. Others fear whole new realms of securities fraud.

Specifically, the JOBS Act exempts issuers from the 1933 prohibition on marketing securities to the general public without first registering with the Securities and Exchange Commission (SEC). Issuers will be allowed to sell up to $1 million in securities, subject to certain conditions ($2 million if the issuer provides investors with audited financial statements), among them use of a disinterested intermediary that is either a broker or "funding portal" registered with the SEC, which is formulating rules for the law's implementation.

[Read: Are Stocks a Screaming Buy? It Depends On Your Time Horizon.]

The traditional processes of raising private capital are "overly burdensome and expensive for companies," says Jonathan Sandlund, founder and CEO of Crowd Cafe, an advocacy platform for the crowdfunding industry. It's also "egregiously exclusive" regarding investors, largely barring from private capital issues anyone who does not meet the SEC's definition of "accredited investor" ($1 million in net worth or earnings of $200,000 a year for two years). You have to be an accredited investor, for example, to use Secondmarket, a platform where big stocks like Facebook and Zynga traded pre-IPO.

An unaccredited investor himself, Sandlund notes that under existing laws, he can walk into a casino and gamble his life's savings away, but "I cannot accept risk and invest in my favorite local businesses. It's absurd. The right to accept risk--and invest in the companies we believe in--should be ours."

Should it? Others see a disaster in the making. For one, the small investors likely to back crowdfunded ventures are "especially vulnerable" to fraudsters and their schemes, wrote William Galvin, Massachusetts Secretary of the Commonwealth, in comments to the SEC this August.

"Longstanding problems in the markets for small and speculative stocks show the pitfalls of relying on the wisdom of crowds," wrote Galvin. "It is clearly possible to deceive large groups of investors, and it is definitely possible for fraud operators to swindle individuals. Unscrupulous penny-stock promoters have used misrepresentations to market obscure and low-value stocks to individuals, often through pump-and-dump schemes."

[Read: How Both Fear and Enthusiasm Mess Up Your Portfolio.]

If the law opens the crowdfunding floodgates--partly through the use of existing social media and who-knows-what future channels--"regulators will end up filing enforcement actions against a very large number of small targets," warns Galvin, taxing the resources of state and federal regulators.

(Issuers could also be at risk, wrote Galvin. Under conventional capitalization models, entrepreneurs use non-disclosure agreements to protect their business plans. Crowdfunded start-ups are likely to be small and unsophisticated, leaving their ideas vulnerable to appropriation by bigger rivals.)

Crowdfunding so far has involved only "perk-based" platforms, exemplified by Kickstarter, which spokesman Justin Kazmark describes as "the intersection of commerce and patronage." The project can't promise profits, merely a share of the output. The most successful project yet funded by Kickstarter, for example, is the Pebble E-paper wristwatch, which received $10.3 million. Pebble backers get a discount on the $150 watches, but not an equity stake in anything.

"That's very different from raising money to start a business where what you have to do to be successful is produce a profitable business," says Barbara Roper, director of investor protection at the Consumer Federation of America. "It's a much more challenging prospect. With these start-ups, under the best of circumstances, with no fraud, most of them will fail. So you're encouraging unsophisticated investors with minimal money to invest to risk that capital on companies most of which will fail."

But what if investors are fully aware of the risks? "Look at all of the information on investor literacy and tell me how confident you are that they will be fully aware of the risks," says Roper. In a country where people chronically undersave for retirement, she says, "diverting limited resources toward speculative investments is a questionable policy goal."

[Read: Need Income From Your Retirement Funds? Try These.]

Sandlund says other countries prove that crowdfunding can work as advertised with a minimum of fraud. He cites Australia's Small Scale Offerings Board, a crowdfunding platform that since 2007 has raised A$130 million (US$135 million) via 176 offerings. ASSOB chief Paul Niederer says there have no incidents of fraud.

Sandlund also notes that the JOBS Act's crowdfunding provisions include investor restrictions. If you make less than $100,000, for example, you'll be able to invest only $2,000 to $5,000 during any 12-month period (depending on your income) in the offerings of any one issuer. There doesn't seem to be any barrier to investing in more than one offering, though.

Whatever the consequences of crowdfunding, they won't be apparent for a while. Nothing can happen until the SEC issues rules for implementing Title III. They were supposed to be out by December 31, but few expect anything until well into 2013. Then, the Financial Industry Regulatory Authority, which will most likely oversee crowdfunding portals, will have to weigh in.

"They have a vested interest against Title III," says Sandlund, "so there are dynamics at play that are not promising."



More From US News & World Report

--

Get stories like this on the Yahoo app and discover more every day.
Download it now.
Loading...
  • Asia stocks hold gains before Yellen speech, dollar firm
    Asia stocks hold gains before Yellen speech, dollar firm Reuters - 5 minutes ago

    Asian stocks edged higher on Thursday but clung to recent well-worn trading ranges while the dollar held firm against regional currencies ahead of a speech by Federal Reserve Chair Janet Yellen at a global central bankers' meeting. MSCI's broadest … More »

  • Huge losses at Australian retail giant Woolworths
    Huge losses at Australian retail giant Woolworths AFP News - 38 minutes ago

    Australian supermarket giant Woolworths on Thursday reported a large annual net loss of Aus$1.23 billion (US$940 million), its first since listing more than two decades ago, following a failed push into hardware and a slump in food sales. … More »

  • Maybank Posts Third Straight Profit Drop on Loan Impairments (1) Bloomberg - 45 minutes ago

    Net income fell to 1.16 billion ringgit ($288 million) in the three months through June from 1.58 billion ringgit a year earlier, the Kuala Lumpur-based company said in a stock exchange filing on Thursday. Maybank reiterated its “vigilance” over … More »

  • SE Asia Stocks-Lacklustre ahead of Yellen speech Reuters - 53 minutes ago

    By Krishna V Kurup Aug 25 (Reuters) - Southeast Asian stock markets were lacklustre on Thursday after an overnight drop on Wall Street, while the dollar rose ahead of a speech by Federal Reserve Chair ... … More »

  • Clean air but murky policy as Yellen speech awaited
    Clean air but murky policy as Yellen speech awaited AFP News - 1 hour 7 minutes ago

    If US Federal Reserve chief Janet Yellen chooses to use her closely watched address on Friday to clear the air, she will have plenty of clearing to do. Yellen, who will address a ballyhooed annual gathering of central bankers in the crisp climate … More »

  • Galaxy’s Profit Beats Estimates as New Resorts Woo Tourists (1) Bloomberg - 1 hour 10 minutes ago

    Adjusted earnings before interest, taxes, depreciation and amortization, or adjusted Ebitda, was HK$2.3 billion ($297 million), compared with the HK$2.25 billion median estimate of five analysts surveyed by Bloomberg. Galaxy, Macau’s largest casino … More »

  • Indonesian navy finds fuel tanker taken by own crew AFP - 1 hour 14 minutes ago

    Indonesia's navy said Thursday it had found a tanker carrying almost $400,000 worth of diesel that was taken by its own crew last week due to a commercial dispute. The MT Vier Harmoni was initially feared ... … More »

  • Oil prices extend losses as dealers eye output talks AFP - 1 hour 25 minutes ago

    Oil prices edged down again in Asian trade Thursday, a day after suffering hefty losses in response to data showing a surprise jump in US stockpiles, while hopes for a deal to limit output were dealt a ... … More »

  • Oil prices dip as focus returns to global supply overhang Reuters - 1 hour 41 minutes ago

    Crude prices dipped on Thursday as brimming U.S. and Asian fuel inventories returned investor attention to a large global supply overhang, cutting short a price-rally and restricting Brent crude futures to below the $50 a barrel mark. International … More »

  • Korea Encourages Stricter Home Loan Screening Amid Record Debt Bloomberg - 1 hour 44 minutes ago

    The pace of household debt has accelerated in recent years as the Bank of Korea lowered rates to unprecedented levels and the government eased property regulations to support the economy. The booming property market has played a key role in … More »

  • Dollar Rally Wanes as Markets Calm Before Yellen; Iron Ore Sinks Bloomberg - 1 hour 45 minutes ago

    The Bloomberg Dollar Spot Index snapped a four-day winning streak that was fueled by hawkish comments from Fed officials. Fluctuations in the MSCI Asia Pacific Index over the past two weeks have been the most muted since 2012 and gauges of expected … More »

  • Aluminium giant Rusal reports 70% net profit plunge AFP - 1 hour 52 minutes ago

    Russian aluminium giant Rusal said Thursday net profit fell 70 percent in the first half of 2016, as weaknesses in global commodities markets keeps prices depressed. The cost of aluminium sank to six-year ... … More »

  • Weekend guide (26-28 Aug): Singapore Night Festival, Tanjong Goodman Weekend Market and Singapore Rhapsodies The Concert 2016
    Weekend guide (26-28 Aug): Singapore Night Festival, Tanjong Goodman Weekend Market and Singapore Rhapsodies The Concert 2016 Yahoo Newsroom - 2 hours 0 minutes ago

    Do everything from planet-gazing at the Science Centre, attending the Singapore Night Festival, shopping at the Tanjong Goodman Weekend Market to catching a concert by Mando pop-rock duo Power Station and more fun events this weekend. … More »

  • Thai Political Risks Wash Over Investors Inured to Coups (1) Bloomberg - 2 hours 6 minutes ago

    “The Thai economy has thus far proven to be resilient and able to bounce back from political shocks,” said Edward Ng, a Singapore-based fixed-income portfolio manager at Nikko Asset Management, which was overseeing more than $170 billion as of … More »

  • Malaysia's closing tin prices for Aug 25 Reuters - 2 hours 14 minutes ago

    KUALA LUMPUR, Aug 25 (Reuters) - Following is a table of Kuala Lumpur tin market prices provided by a Malaysian trader. (Prices in $/tonne, and volumes in tonnes unless stated) Date KL Premium/ Spot Bid ... … More »

  • Why It Makes Sense To Own A Credit Card From Young DollarsAndSense.sg - 2 hours 15 minutes ago

    Being financially responsible starts from a young age. The post Why It Makes Sense To Own A Credit Card From Young appeared first on DollarsAndSense.sg. … More »

  • Dollar edges lower as market awaits Yellen speech AFP - 2 hours 16 minutes ago

    The dollar was barely moved Thursday ahead of a speech by Federal Reserve boss Janet Yellen that could shed light on whether a 2016 rate hike is still on the cards. With the economic calendar relatively ... … More »

  • Gabon's Bongo finds new pep on the campaign trail
    Gabon's Bongo finds new pep on the campaign trail AFP News - 2 hours 44 minutes ago

    Ali Bongo of Gabon, who is running for a second seven-year term in Saturday's presidential election, has spent more than half his 57 years cruising the corridors of power. Known variously by his initials ABO, Ali B and less flatteringly as … More »

  • Asia energy firms extend losses as oil falls
    Asia energy firms extend losses as oil falls AFP News - 2 hours 48 minutes ago

    Asian energy firms fell further on Thursday as oil extended losses, while currency traders moved cautiously the day before a key speech by Federal Reserve boss Janet Yellen. World markets have struggled to gain traction this week with few catalysts … More »

  • Indonesia finds ship that was taken by disgruntled crew Associated Press - 2 hours 58 minutes ago

    Indonesia's navy said Thursday it has located a fuel tanker that was missing for a week after being taken from port by its disgruntled crew. The navy said in a statement that the MT Vier Harmoni with 10 ... … More »

  • China's CNOOC reports $1.16 bn net loss
    China's CNOOC reports $1.16 bn net loss AFP News - 3 hours ago

    China's main offshore oil and gas producer CNOOC saw its shares on the Hong Kong stock exchange fall on Thursday, after it reported a $1.16 billion net loss for the first half of 2016. It was the company's first half-year loss since it started … More »

  • Marketing solutions company CtrlShift names new CEO, CFO and Malaysia Country Head
    Marketing solutions company CtrlShift names new CEO, CFO and Malaysia Country Head e27 - 3 hours ago

    Team to take on Southeast Asia’s digital advertising industry, expected to hit US$9.9 billion by 2025     CtrlShift, a data-driven audience-focussed marketing solutions company, has announced three new appointments to its management team. Deepika … More »

  • PBOC Money-Market Tactic Has Traders Trying to Decode Signal (2) Bloomberg - 3 hours ago

    The People’s Bank of China sold 50 billion yuan ($7.5 billion) of 14-day reverse-repurchase agreements on Wednesday, its first offering of anything with a tenor other than seven days since February. Officials are signaling they’re ready to curb … More »

  • Asian shares waver in thin trading after Wall Street decline
    Asian shares waver in thin trading after Wall Street decline Associated Press - 3 hours ago

    Shares wavered in thin but volatile trading in Asia on Thursday, following a bleak day on Wall Street led by declines in health-care stocks as outrage mounts over steep price hikes for Mylan's EpiPens. ... … More »

  • This is what the world of finance really thinks of Donald Trump
    This is what the world of finance really thinks of Donald Trump Truewealth Publishing - 3 hours ago

    The chances are slim – somewhere between 4 and 21 percent, depending on the source – that Donald Trump will become the next president of the U.S. But as long as there’s any chance at all that he’ll become the American president (and as long as he’s … More »

 
Recent Quotes
Symbol Price Change % Chg 
Your most recently viewed tickers will automatically show up here if you type a ticker in the "Enter symbol/company" at the bottom of this module.
You need to enable your browser cookies to view your most recent quotes.
 
Sign-in to view quotes in your portfolios.

MARKET MOVERS

  • Most Actives
    Most Actives
    NamePriceChange% Chg
    0.1290.0000.00%
    N21.SI
    0.600.000.00%
    5TP.SI
    1.00+0.01+1.01%
    Y92.SI
    1.045-0.035-3.24%
    OV8.SI
    2.83+0.01+0.35%
    C52.SI
  • % Gainers
    % Gainers
    NamePriceChange% Chg
    0.47+0.09+22.08%
    E8Z.SI
    0.605+0.055+10.00%
    BDR.SI
    0.34+0.03+11.48%
    41A.SI
    0.275+0.020+7.84%
    BRD.SI
    0.730.00+0.69%
    BQC.SI
  • % Losers
    % Losers
    NamePriceChange% Chg
    0.26-0.04-13.33%
    BDU.SI
    0.156-0.024-13.33%
    M11.SI
    0.20-0.03-13.04%
    AWI.SI
    0.40-0.05-11.11%
    BFK.SI
    0.20-0.02-11.11%
    BQN.SI

Market Data

  • Currencies
    Currencies
    NamePriceChange% Chg
    1.3527-0.001-0.08%
    USDSGD=X
    1.5251+0.0002+0.01%
    EURSGD=X
    1.7894-0.0012-0.07%
    GBPSGD=X
    74.2370+0.094+0.13%
    SGDJPY=X
    5.7310+0.0074+0.13%
    SGDHKD=X
    2.9803+0.0034+0.11%
    SGDMYR=X
    9,801.7441+18.5029+0.19%
    SGDIDR=X
    4.9217+0.0084+0.17%
    SGDCNY=X
    1.0318+0.0011+0.11%
    AUDSGD=X
  • Commodities
    Commodities
    NamePriceChange% Chg
    1,328.70-1.00-0.08%
    GCZ16.CMX
    18.560.00+0.02%
    SIU16.CMX
    95.34-8.55-8.23%
    ^XAU
    2.09+0.01+0.65%
    HGU16.CMX
    46.89+0.12+0.26%
    CLV16.NYM
  • Bonds
    Bonds
    TreasuryYield (%)Yield Change
    1.140.00
    ^FVX
    1.56+0.01
    ^TNX
    2.24+0.01
    ^TYX