BASICS FOR INVESTMENT CROWDFUNDING INVESTORS
As an Investor—or potential future Investor—your choices of investment are important for both your and your family’s future. Most financial professionals recommend a balanced and diversified investment portfolio with a level of risk appropriate to the individual Investor. In today’s market, we understand that many of these professionals are recommending 5-10% of a person’s investments be in an asset class known as Alternative Investments. Crowdfunding, or more correctly, Investment Crowdfunding, is just one type, amongst many, considered a type of Alternative Investment.
The NLCFA does not recommend you make any Crowdfunding Investment in any amounts unless and until:
- you fully understand the nature of your investment and have carefully studied each company and its management into which you would be investing
- understand that, generally, small companies are thought to have more investment risk than large well-financed ones
- you—and those who depend upon you—are fully prepared for a complete loss of your investment should it occur
- you understand that in all events any investment, even if ultimately successful for you, will be illiquid and you will not be able to see any return for an extended time
- you acknowledge to yourself that unless you are a trained financial professional, you are better advised to seek qualified financial advice (such as from a Registered Investment Adviser) in advance of any Crowdfunding Investment
You’ll find below a list of important questions—and what we feel are the answers to them.
Remember that this Association is committed to the highest level of professionalism. We cannot vouch for any person or Company seeking an investment from you including other members; you must do your own due diligence. Should you at any time believe that a member of this organization has behaved unethically, we ask you to let us know.
INVESTORS' FREQUENTLY ASKED QUESTIONS: (scroll down)
WHAT IS INVESTMENT CROWDFUNDING?
For an Investor, it is the risk—and opportunity—to either, or both, invest money into or loan money to small entrepreneurial companies. Investment Crowdfunding is lawful in the U.S. beginning as soon as the SEC final rules are put in place. March 2013, or after, is the now likely start date, though it could come as early as January, 2013—provided it is done within the rules Congress laid out April 5th, 2012.
HOW MUCH CAN BE INVESTED?
Because of Congress’ desire to protect Investors from fraud and to help to ensure that no Investor risks too much hard earned money in Investment Crowdfunding, individual investments (and the total of all individual investments) are limited to $2,000 or 5% of a person’s income or net worth; this amount changes to 10% if the person’s net worth or income but not more than $100,000 in any one investment. This means (subject to the SEC regulations changing this) that if you make $50,000 per year (and you do not have a net worth EXCLUDING your home equity), you are limited to a TOTAL of $2,500 (which is 5% of $50,000) for ALL Crowdfunding Investments you make in a year.
HOW MUCH SHOULD I INVEST IN CROWDFUNDING?
If you have been advised by a qualified financial adviser, then invest only amounts which are not in excess of the lesser of those permitted by law or the amounts advised by your qualified financial adviser. If you do not have a qualified financial adviser, and choose not to retain one, or cannot afford one, then you should invest no more than you, and your family, are prepared to and can afford to lose. Unless you are trained or educated in investing, it is recommended that, if you can afford it, you first seek a qualified investment adviser. You can and should first learn about investing. The U.S. Securities and Exchange Commission (which is a part of the U.S. government) provides excellent investing information at the website: www.investor.gov.
HOW CAN I INVEST IN LAWFUL INVESTMENT CROWDFUNDING OPPORTUNITIES?
This cannot be lawfully done in the United States until sometime after January 1, 2012 and then only when the U.S. Securities and Exchange Committee made effective an investment crowdfunding rule which Congress directed it to write. Once this is done, and after you have learned about investing in general and the risks of and opportunities which may be available through investment crowdfunding, you can check out any of what will be many investment crowdfunding websites. In specifics, you should, prior to making any investment:
- Make sure you are dealing with a legitimate investment crowdfunding portal or broker-dealer. This can and should be done only at: www.finra.org/Investors/ToolsCalculators/BrokerCheck/ (or other www.finra.org link only on its website and which may permit checks of funding portals)
- Make sure that you, and your family, can afford to lose all amounts you may decide to invest through investment crowdfunding. Even if you get back some or all of your investment or ultimately make a positive return on your investment, you will not have immediate access to any funds you invest in a crowdfund investment.
- Review, on the FINRA registered funding portal or broker dealer website(s), the particulars of any one or more potential investments, the background check of the principals of the company offering the investment, the business plan and financial plan, the explanation of the value the company feels that it any your shares, membership interests, or other investment is worth, what the company plan and timing is for you to see a return on your investment, and all other information important for you to make your investing decision. A website, http://investor.gov/investing-basics/guiding-principles/five-questions-ask-before-you-invest, provides a list of 5 questions to ask before you invest. A registered Crowdfunding Portal is prohibited from offering any investment advice. A registered Broker-Dealer is permitted to provide investment advice (if qualified and incidental to being a broker-dealer), as is an attorney, accountant, engineer, or teacher (if qualified and incidental to the profession).
- Follow the steps provided on the FINRA registered portal or broker-dealer for the mechanics of making the investment. Be advised: registered portals are not authorized to accept any funds from any investor; the investment must go directly from the investor to a separate type of escrow or account which the portal does not have access to, and neither does the company into which any investment is made, until the registered funding portal has confirmed that the minimum total investments have been made and that other steps required by regulation of the funding portal have been fulfilled. Only at this time will the funding portal authorize the funds from investors to be transferred to the Company you are investing into. (Note: a registered broker-dealer is authorized by law to hold funds from investors.)
WHAT ARE THE TERMS OF THE INVESTMENT?
It will differ for each investment. It depends entirely upon the terms set by the Company asking an Investor to invest—as long as those terms and the investment comply with the rules put out by Congress and the SEC.
HOW MUCH CAN I MAKE?
There will be no assurance that you will ever make any money. In fact, you might lose all of the money you invest. All businesses change. What might look profitable today may well fail a month from now. You’ll have to judge for yourself based upon the information provided to you and any qualified financial advice you can obtain prior to any investment. In short: Buyer Beware.
HOW DOES IT WORK IF I WANT TO INVESTIGATE INVESTING IN A CROWDFUND ELIGIBLE BUSINESS?
A potential Investor (You) contacts a registered broker-dealer or a registered funding portal, usually through the internet. You will have to show to the Broker-Dealer or Funding Portal that you understand the potential risks and potential benefits of a Crowdfund Investment. You may have to review materials or video clips and answer various questions correctly. Then you will have to certify your income and total crowdfunding investments, and provide other information. There will be privacy restrictions on the use of the information you provide.
WHAT ARE BROKER-DEALERS AND FUNDING PORTALS?
Each are types of businesses which Congress has required be strictly regulated and supervised by the U.S. Securities and Exchange Commission. They are also required to be licensed and supervised by the Financial Industry Regulatory Authority or FINRA (formerly the NASD). Broker-Dealers are permitted to offer financial advice. Funding Portals are NOT permitted to offer financial advice. No Funding Portal will be licensed for operation until January 2013, at the earliest.
HOW DOES ONE LOCATE OR CHECK-ON A FINRA REGISTERED BROKER DEALER OR FUNDING PORTAL?
By going to the FINRA website (www.finra.org), through an internet search, or through your own network. Beginning in 2013, it is likely that you will have family, friends, acquaintances, and strangers contacting you about potential Investment Crowdfunding. BEFORE making ANY investment with or through any Funding Portal or Broker-Dealer, each Investor should check on the FINRA website to ensure that the Funding Portal or Broker-Dealer is registered. FINRA also lists any disciplinary actions which may be on the record of the Broker-Dealer (and its registered representatives) or the Funding Portal.
WHO WOULD CONSIDER INVESTING?
Only those who have enough money to place their Investment Crowdfunding money at risk for an extended period of time and are prepared and can afford to lose all of it if the investment does not pan out—and preferably after receiving sound financial advice from a qualified financial adviser about Investment Crowdfunding in general and potential individual investments in particular.
WHAT MATERIALS ABOUT THE COMPANY WILL BE AVAILABLE FOR AN INVESTOR REVIEW PRIOR TO INVESTING?
All materials that the SEC and Broker-Dealer and Funding Portal require should be available through their website, or in person if they have a physical office, to review (if the regulations so permit). These would include a limited background check on the Company’s principals, financial information about the business, a business plan, how the price of the investment was determined, and the Company’s plan for the Investor to eventually get out of the investment. Most importantly, it will need to show all the anticipated risks of the investment. In short, it should contain all material information about the investment as required by the SEC. These materials, though, WILL NOT mean that any investment is a good one or that you will ever see any return on that investment or even receive any of your money back.
WHERE CAN AN INVESTOR READ THE ENTIRE SEC RULES APPLICABLE TO CROWDFUNDING?
They do not yet exist. Congress directed the SEC to write rules to go into effect 270 days after April 5, 2012. While draft rules are expected to be published for public comment during the summer of 2012, the final rules are not expected to be published until late fall 2012. The current SEC request for comments about Crowdfunding and other parts of the JOBS Act can be found at: www.sec.gov/spotlight/jobsactcomments.shtml. The text of the JOBS ACT (Jumpstart Our Business Startup Act in which the Crowdfunding Act can be found) can be found at: www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf.
HOW CAN THE NATIONAL CROWDFUNDING ASSOCIATION (NLCFA) BE OF HELP TO INVESTORS?
By being a resource for information and education and a forum through which investors will have access to industry members and experts. The National Crowdfunding Association cannot by law provide investment advice to Investors. It can, and will, provide information to help an Investor secure appropriate financial advice as well as to provide information in the event an Investor feels defrauded or that an industry member has behaved unethically.
ETHICAL COMMITMENT OF THE NLCFA:
The NLCFA is deeply committed to promoting high legal and ethical standards in the Investment Crowdfunding Industry. If alleged fraud is reported to it, the NLCFA will direct the person reporting it to the appropriate state or federal regulatory authorities whose job it is to police fraud. Should any of its own Members be shown to have engaged in unlawful or unethical behavior, the NLCFA intends, after an appropriate investigation, to expel any member who it may feel has demonstrated unethical or illegal behavior.