Crowd-Funding in the Wild West

Welcome to the January 2017 edition of our newsletter! In this issue, we’ll examine concerns about crowd-funded star-ups now that laws meant to encourage investment in them have taken effect.

In past editions, we discussed potential opportunities and risks related to the U.S. Securities and Exchange Commission’s rules, then in development, concerning crowd-funding of smaller companies. Now that those rules, under the 2012 JOBS Act, are in effect, we have the virtue of seeing theoretical ideas put into practice.

The opportunities for small companies to raise capital — and for investors to contribute to them — were described as the drivers behind that portion of the JOBS Act. Yet a “Wild West” feel remains in the marketplace, as at least one survey, by CrowdCheck, said as many as 40 percent of crowd-funded companies surveyed had not audited or certified their financial results. Checks are in place against massive investor losses — the amount a company can raise from “ordinary investors” cannot exceed $1 million, although accredited investors can contribute more — but risks remain, for both potential investors and companies seeking investment. Due diligence on a firm’s principals, including reputational interviews and, if possible, analysis of a firm’s books and records, are essential as investors consider navigating what is largely a new and untested environment.