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Regulators Balk at ‘Crowd Funding’ Plan

A proposal to expand private placement offerings via the Internet has state regulators up in arms. Specifically, a bill pending in Congress would use social networking as a way to sell online private placement offerings to more investors. Critics say the concept, known as crowd funding, is a dangerous one, with the potential to victimize investors.

Last week, the House Financial Services committee backed legislation that would make it possible for small businesses to use crowd funding to raise money from investors in exchange for equity stakes. The legislation is expected to go to the House floor for a vote later this week. The measure also would have to pass the Senate and already is facing opposition from state regulators.

Among other things, critics of the crowd-funding legislation say it’s likely to breed fraud and place countless number of unsophisticated investors in financial risk.

“It’s dangerous,” said Heath Abshure, the commissioner of the Arkansas Securities Department, in a Nov. 1 article in Barrons. “Successful investors in small businesses tend to be savvy investors with deep knowledge of a business and its market. Mom and Pop investors on the Internet don’t have the ability to make the right kinds of assessments.”

“This is tailor-made for Internet fraud,” said Mercer Bullard, a law professor at the University of Mississippi, in the same Barrons article. “The measure would allow someone living solely on Social Security to invest $1,500 in an unregistered offering sold through a website that wasn’t subject to regulation as a broker.”

Indeed, using the Internet for crowd-funded deals would affect current protections under which private placements are sold. Currently, those protections do not allow public solicitation and limit the amounts sold to non-accredited investors. That would be eliminated under the proposed crowd-funding plan.

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