Crowd funding warning from Washington and the SEC

It hasn’t even gone into effect yet, and the state and the
Securities and Exchange Commission are already issuing
warnings about one provision of the president’s new JOBS
Act. A portion of the legislation recently signed lets
average Americans become venture capitalists by creating
new rules on “crowd funding.”

So far, websites like Kickstarter have let individuals donate
money to start ups trying to get off the ground. Under
the JOBS Act, you will be able to make a true investment
and gain capital in the company.

There is just one problem. It will be at least next year
before the provision goes into effect. The SEC has been
given a nine-month deadline to create rules and
regulations to make it happen.

“Any of these offerings that pretend to be part of the
JOBS Act or something like that are wrong. They’re
illegal,” says Bill Beatty, the Securities Administrator
at the Washington State Department of Financial
Institutions.

Beatty says until he sees how the SEC sets up the new
“investment portals” required for crowd funding, he is not
sure what the state might be in for.

“We are concerned because state regulators are preempted
from regulating these new crowd funding offerings, so it’s
going to entirely be done at the federal level. And,
we’ve all heard and seen the difficulties the SEC is
facing right now,” says Beatty.

There is one group of investors who is already dipping
their toe into the crowd funding pool in a pretty big way.
They are known as “angel investors.”

Generally, a company cannot sell stock unless it registers
the stock and has an initial public offering. Exceptions
are made for wealthy, private investors who are
accredited.

Local attorney William Carleton works with the Angel
Capital Association. He says angels are different from
typical venture capitalists because they often do not
expect to see much of a return on their investment.

Angels are split over whether the new rules on crowd
funding are a good idea.

“Some don’t think that it’s something the general public
ought to engage in because there’s too much room for
fraud. These kinds of start-up ventures are the riskiest,
and most of them end up failing, and so people will lose
their money,” says Carleton.

On the other hand, Carleton says other angels think crowd
funding should be open for anyone to invest.

While angels like to bolster new companies in the fields
that interest them, often the electronics industry, the
Internet and healthcare, Carleton thinks most individuals
will be more interested in owning a piece of a local
business they can visit everyday.

There is at least nine months before the new rules can be
implemented. If this all sounds interesting to you,
Beatty says you have plenty of time to do your homework.

“The same old maxim applies. Investigate before you
invest. If it sounds too good to be true, it probably is.
Be careful and thoughtful with what you do with your
money.”

And, Beatty adds, it is never a good idea to send a
cashier’s check to Nigeria.