State warns consumers about crowdfunding

The state Department of Financial Institutions today issued a warning to consumers about the emerging practice of crowdfunding. We’ve written about it before, but the state news release below lays it out pretty well, too.


For immediate release from the Washington Department of Financial Institutions

Tuesday, May 15, 2012

CONTACT: Lyn Peters, DFI Director of Communications

PH 360.902.8731, lyn.peters@dfi.wa.gov

Bill Beatty, Director Division of Securities

PH 360.902.8723, William.Beatty@dfi.wa.gov

Washington Department of Financial Institutions warns of potential dangers of crowdfunding investment opportunities

OLYMPIA – The Washington State Department of Financial Institutions issued an advisory today warning investors to approach crowdfunding investment opportunities with great caution. The advisory is on DFI’s website at http://dfi.wa.gov/consumers/alerts/crowdfunding-alert.pdf.

Crowdfunding is an online money-raising strategy that began as a way for the public to donate small amounts of money, often through social networking websites, to help artists, musicians, filmmakers and other creative people finance their projects. Through the Jumpstart Our Business Startups (JOBS) Act, small businesses and entrepreneurs will be able to tap into the “crowd” in search of investments to finance their business ventures.

Congress enacted the JOBS Act last month and directed the Securities and Exchange Commission (SEC) to adopt rules to implement a new exemption to allow crowdfunding. Until the rules are adopted, “any offers or sales of securities purporting to rely on the crowdfunding exemption would be unlawful under the federal securities laws,” according to a recent SEC release.

“Before the SEC rules are adopted, investors should beware of promoters who jump the gun by offering investments through crowdfunding now,” DFI Securities Division Director Bill Beatty said. “Once exempt, crowdfunding investments will not be reviewed by regulators before they are offered to the public. Investors will need to be vigilant to protect themselves.”

Beatty said Congress created a similar situation in 1996 with the passage of the National Securities Markets Improvement Act (NSMIA), which also prohibited states from reviewing offerings made under SEC Regulation D Rule 506 before they were sold to the public.

“Since NSMIA, the provisions of Rule 506 and other limited or private offering provisions have been used – and continue to be used – by unscrupulous promoters to fleece investors,” Beatty said, noting that the North American Securities Administrators Association (NASAA), of which Washington DFI is a member, reports these offerings to be a frequent source of enforcement cases handled by state securities regulators.

“If history is any guide, investors may have a similar experience with crowdfunding investments,” DFI Director Scott Jarvis said. “We hope to limit the damage by raising awareness among investors of the potential pitfalls of investing through crowdfunding.”

Jarvis added that NASAA has created a new task force to focus on Internet fraud. The Internet Fraud Investigations Project Group was formed to monitor crowdfunding and other Internet offerings.

Investors with questions about crowdfunding offerings should contact the DFI Securities Division — before investing — at www.dfi.wa.gov/sd or 360.902.8760.

###

About DFI • www.dfi.wa.gov • 360.902.8700 • 877.RINGDFI (746.4334)

The Washington State Department of Financial Institutions regulates a variety of financial service providers such as banks, credit unions, mortgage brokers, consumer loan companies, payday lenders and securities brokers and dealers. The department also works to improve financial education throughout Washington through its outreach programs and online clearinghouse www.dfi.wa.gov/financial-education. In addition to posting information about licensees and administrative actions, DFI uses the Web and social media to provide financial education information: www.twitter.com/FinEd4All • www.twitter.com/DFIConsumers • www.finlit.blogspot.com • www.youtube.com/user/WADFI • www.homeownership.wa.gov

About the Division of Securities • www.dfi.wa.gov/sd • 360.902.8760

The Division of Securities regulates securities investments, franchises, business opportunities, and off-exchange commodities sold in Washington and the firms and individuals that sell these products or provide investment advice. The Division handles complaints, conducts investigations, and takes appropriate enforcement actions to protect investors and combat fraud.

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