With the May 2016 effective date of the new crowdfunding rules approaching, the SEC is attempting to help prepare the market. On February 16, 2016, the SEC’s Office of Investor Education and Advocacy issued an investor bulletin relating to crowdfunded offerings. The bulletin is intended to help educate investors about the opportunities, and the risks, arising from these offerings.
The full bulletin may be found at the following link: https://www.sec.gov/oiea/investor-alerts-bulletins/ib_crowdfunding-.html.
The bulletin contains some helpful examples to help illustrate the 12-month investment amount limit that applies to investors. It also provides some plain-English guidance, as well as additional examples, to help an investor calculate his or her net worth for purposes of determining this limit. (See our client alert, “Following the Wisdom of the Crowd?” (http://www.mofo.com/~/media/Files/ClientAlert/2015/11/151102SECCrowdfunding.pdf) for a summary of these and other aspects of the rules.)
Of course, the bulletin reminds investors of the risks associated with crowdfunding (and other early-stage investments), including:
- the potential speculative nature of an investment;
- the illiquidity of a crowdfunded investment;
- limitations on cancellation of investment order(s) under the crowdfunding rules;
- the purchase price of an investment is determined by the offerors, and may exceed fair market value of the securities;
- only limited disclosures are available from the issuer;
- many issuers depend upon key personnel, and may use a significant portion of the proceeds from the offering to compensate management; and
- for some issuers, lack of experienced management or advisors.
As is the case for several of the SEC’s recent liberalizations of non-registered offerings, some safeguards have been built into the rules to ensure that they are used for legitimate purposes; however, the regulators have indicated that they will monitor activity to ensure that the new rules are not used to perpetuate a fraud. In that regard, we note in particular the following risk set forth in the bulletin:
Possibility of fraud. In light of the relative ease with which early-stage companies can raise funds through crowdfunding, it may be the case that certain opportunities turn out to be money-losing fraudulent schemes. As with other investments, there is no guarantee that crowdfunding investments will be immune from fraud.
Finally, the bulletin reminds investors to review the educational materials provided by crowdfunding platforms and the disclosure documents, including financials, provided by the relevant issuers.