According to the regulators, crowdfunding, or raising money through websites, is quite new and the scams are just taking off. Crowdfunding makes investment in startup ventures easily available to masses, and some portions of the JOBS Act will make it easier for swindlers by shifting crowdfunding from a “donation” model to a proper investment model of doing business.
The JOBS Act passed the Congress with bipartisan support but has been criticized by regulators. Both U.S. Securities and Exchange Commission Chairman Mary Schapiro and SEC commissioner Luis Aguilar have voiced concerns about various provisions of the JOBS Act.
Matt Kitzi, the Enforcement Section Chair and Missouri Securities Commissioner of NASAA said, “The number of entities out there already pitching themselves as crowdfunding entities online has risen in a significant fashion … Just look at web domain names: it has gone from a couple hundred to well over 1,600 in the past year. They are staking up a position to enter crowdfunding market. There will be a lot more to come on this.”
In early August, the Massachusetts Securities Division charged a man for a crowdfunding scam in which about 20 investors were bilked. The investors thought they were investing money in a gaming site of $153,396.
William Gavin, the Secretary of the Commonwealth wrote to the SEC following the unearthing of the scam to ensure that the JOBS Act does not become a tool for financial fraud and abuse. He wrote, “Longstanding problems in the markets for small and speculative stocks show the pitfalls of relying on the wisdom of crowds.”
The report by NASAA also highlighted “Reg D/Rule 506 Private Offereings” which includes marketing investments and are not registered with the SEC. The JOBS Act is also relaxing regulations on these types of investments and would allow broader advertising – leading to easier fraud.
The SEC is scheduled to meet next week to discuss lifting the ban on general advertising for private securities as required under the JOBS Act.