Crowdfunding: Friend or Foe?

by Kenneth C. Oh on September 7, 2012

CrowdfundingCrowdfunding is an increasingly popular way for New York and New Jersey businesses to fund start-ups and growing ventures. It allows small businesses and entrepreneurs to use the Internet to raise money through contributions from a large number of people.

Crowdfunding began as a way for individuals to donate small amounts of money for a common purpose, often an artistic or humanitarian purpose.  Through the JOBS Act, businesses will be able tap into the crowd and seek equity investors.  However, it may be more difficult to find investors following a recent alert by state securities regulators. The North American Securities Administrators Association (NASAA) recently listed crowdfunding as its top investor threat for 2012.

Citing the relaxing of rules under the JOBS Act, NASAA warns, “The crowdfunding and Internet investing marketplaces in North America will develop and undergo major changes in the next year, and investors should monitor this emerging capital formation community with a wary eye.” NASAA also mentions that state securities regulators have reported an uptick in enforcements actions involving investments sold and/or advertised via the Internet.

Nonetheless, crowdfunding is still an attractive way to raise capital. This year alone, donation-based crowdfunding platforms like Kickstarter are predicted to raise approximately $3.2 billion dollars, according to a recent Forbes article. In addition, countries across the globe like the United Kingdom and Australia have already loosened the reigns on crowdfunding with much success.

In the United States, the pool of available investors will increase as the Securities and Exchange Commission continues to roll out new rules under the JOBS Act. The SEC recently released rules regarding the use of crowdfunding to solicit accredited investors and is expected to announce additional rulemakings related to crowdfund portals and non-accredited investor participation by the end of the year.

If you have any questions about crowdfunding, please contact me, Ken Oh, or the Scarinci Hollenbeck attorney with whom you work.

 

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Crowdfunding: Friend or Foe?Kenneth C. OhSeptember 7, 2012



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