The Financial Industry Regulatory Authority is warning investors about the risks of investing in crowdfunding deals.
Under new rules effective Monday, investors can now invest in private securities offered on crowdfunding portals or through broker-dealers.
Investments are limited to a maximum of $100,000 over any 12-month period, or less depending on an investor’s income or net worth.
As crowdfunding went live today, Finra issued an investor alert about the risks of investing in small start-ups.
“Ask yourself if you can handle the risk—and the potential loss of your investment,” the alert said.
“Recognize that fraud is a possibility,” Finra added. “Proceed with caution if you turn up legal or regulatory concerns about [start-up] company officials, or news reports that raise other red flags.”
Investors will have limited ability to resell their investments for the first year, and may need to hold the illiquid private securities for indefinite periods, the alert said.
Additionally, crowd-funded start-ups may not have audited financials, Finra said.
Sales of securities through crowdfunding were allowed under the JOBS Act of 2012, which created a new registration exemption for offerings of up to $1,000,000 during a 12-month period.
The SEC approved its crowdfunding rules last October and in January approved related Finra rules for broker-dealers and portals.
Nine crowdfunding portals are now registered with the SEC and Finra.
The JOB Act’s deregulation of private offerings, which included crowd-funded deals, has not been without controversy.
State regulators and investor advocacy groups have warned about the possibility of fraud.
Separately on Monday, the North American Securities Administrators Association proposed model rules that would require state “notice filings” of some crowd-funded offerings.
Notice filings give state regulators a heads-up of private securities sales by offerers operating in a state.
The JOBS Act let states require the filings in the state that is either the principal place of business of the crowdfunding issuer, or where purchasers of half or more of the offering reside.
“States may wish to require notice filings in these circumstances to provide a basic level of regulatory oversight,” said Judith Shaw, NASAA president and Maine Securities administrator, in a statement.