State and provincial securities regulators have put the new investment phenomenon of crowdfunding at the top of their annual investment scams list, highlighting a recent controversial U.S. law that relaxes capital-raising rules on small companies.
The North American Securities Administrators Association, whose members include the regulators, evaluated emerging and ongoing threats to investors in its recently released 2012 list of top investor traps. The list also included mid-size investment advisers, and oil- and gas-drilling schemes.
Crowdfunding, which allows fundraising for projects via websites, is relatively new, and scams are just getting started, the regulators said.
New law on horizon
The idea is to make investment in start-up ventures easily available to the masses. Portions of the Jumpstart Our Business Startups Act (JOBS Act), which go into effect in 2013, will push crowdfunding from a “donation” model to a true investment model, and that will make it even more of a lure for swindlers, NASAA said.
The JOBS Act passed Congress with bipartisan support and became law in April, but it faced opposition from some Democrats and advocacy groups who said it would roll back important investor protections.
“The number of entities out there already pitching themselves as crowdfunding entities online has risen in a significant fashion,” said Matt Kitzi, NASAA enforcement section chair and Missouri Securities commissioner. “Just look at Web domain names: It has gone from a…