The North American Securities Administrators Association has released the 2013 list of financial products, practices and services posing a threat to investors. For the first time, the list includes dangers affecting small businesses.
At the root of the warnings in the Jumpstart Our Business Startups Act of 2012, legislations designed to free up access to equity for entrepreneurs who often are shut out of traditional funding.
“With the rollout of rules required by the JOBS Act, investors and small business owners alike must be on heightened alert for questionable investment offers and services,” said Andrea Seidt, NASAA president.
While the report includes some fraud evergreens – real estate schemes, high-yield investment and Ponzi fraud, bogus oil and gas programs, and affinity fraud – several new threats have also been detected.
For instance, the arrival of digital currency such as Bitcoin and PP Coin has captured the imagination of many tech-oriented consumers. These alternative types of payment, used online, are not backed by any tangible assets and are not issued by a government authority, and therefore, not subject to any regulation.
“This environment has proved fertile ground for scam artists to capitalize on the increasing popularity and acceptance of digit currencies. Investors should be aware that investments that incorporate abstract money systems present very real risks, including the possibility of virtual reality leaving an investor virtually broke,” warns the report.
On the business side, NASAA is encouraging business to be diligent when considering crowdfunding, an element of the JOBS Act. The concept is to allow small businesses to access equity through private placements of securities without registering the offering with the Securities and Exchange Commission.
The SEC will soon release its rules regarding crowdfunding, but it still most likely will require investors be accredited, meaning incomes of more than $200,000 or a net worth exceeding $1 million.
The new rules also open the opportunity for third parties to provide services to small businesses to help raise investment capital.
“Not only should a small business or other entrepreneur make sure they are dealing with a legitimate service provider, they should also make sure the service being offered is in full compliance with all federal and state requirements. Since the passage of the JOBS Act, new firms have joined existing firms that offer to sell lists of accredited investors for use in private placements offerings.
“However, new rules recently adopted by the SEC include more stringent requirements replacing the old failsafe of reliance on an investor-completed questionnaire claiming accredited investor status. If not done carefully and with federal requirements in mind, an entrepreneur will suffer the consequences,” cites the report.
“Whether a crowdfunding portal or an accredited investor aggregator, it is important to do your due diligence and to understand that use of an unregulated third party to provide such services does not change your obligations under federal and state securities laws. Investors are not alone in the potential to be scammed. Using a fraudulent portal means both the business and the investor stand to lose,” Seidt said.