Regulators sounded the alarms Tuesday over crowdfunding investment websites, warning that the fledgling sector still contains many pitfalls for investors.
Democratic SEC Commissioner Kara Stein, speaking at a SEC forum along with other regulators, said many of the portals that offer crowdfunding companies for investors to consider are doing a poor job at due diligence, which could open the way to fraud.
Stein warned “once bitten, twice shy investors” who felt they were defrauded by one issuer could decide to stay away from the crowdfunding marketplace permanently.
One possible solution, said the SEC commissioner, would be to have uniform vetting standards.
Sara Hanks, co-chair of the SEC Small and Emerging Companies Advisory Committee, and Marc Sharma, chief counsel of the Office of the Investor Advocate, cautioned that crowdfunding investors need to be on the lookout for companies seeking their money with fictionally high valuations.
“Some valuations can only be described as fictional. We’re seeing some crazy high,” said Hanks, CEO of CrowdCheck, a crowdfunding consulting firm.
Disclosure compliance by crowdfunding issuers has been inconsistent and some violations have been worse than others, she added.
She said part of the problem for issuers and the crowdfunding portals that match issuers with investors is they don’t have the money to pay for compliance staffers.
Sharma said investors thinking about investing in a crowdfunding company should be aware that they won’t be receiving the same level and frequency of disclosure as with public companies.
He also warned that crowdfunding companies don’t have the same caliber of professional guidance as public companies and larger start-ups that are aided by venture capital companies.