The U.S. Securities and Exchange Commission’s (SEC’s) Office of Investor Education and Advocacy on Tuesday issued a bulletin that aims to educate investors about the arrival of securities-based crowdfunding, which will give ordinary retail investors the opportunity to participate in early-stage capital raising for start-up companies.
Firms will be able to start issuing securities under the new U.S. regime as of May 16.
According to the bulletin, anyone can invest in a crowdfunded offering, subject to investment limits that are tied to the investor’s net worth and annual income. Investments must be made through an SEC-registered funding portal, or a broker-dealer, they cannot be offered directly.
Early-stage investments “may involve very high risks,” the bulletin notes, and it advises investors to thoroughly research any offering, including risks such as the lack of liquidity, cancellation restrictions, valuation and capitalization risks, limited disclosure, the risk of fraud, and the lack of professional guidance.
“Being a crowdfunding investor is different than being a shareholder in a publicly listed company,” the bulletin says. “For one thing, you cannot sell your shares at any time as you would be able to do if you held shares in a publicly listed company. In fact, you are restricted from reselling your shares for the first year,” it adds. Another key difference is the amount of financial disclosure that issuers must provide, which depends on the amount of money raised by the firm.
Several Canadian jurisdictions have also adopted their own equity crowdfunding regimes over the past year, which utilize some of the same provisions, including investment limits, portal registration requirements.