Thanks to the jumpstart our Business Startups Act enacted on April 5, there's a new concept triggering buzz, both positive and negative, among financial advisors. Called "crowdfunding," it's the ability of companies to raise money through large numbers of people.

Financial advisors who fail to gear up now for this provision of the JOBS Act, dubbed the "Crowdfund Act," could be missing a major business opportunity, warns Candace Klein, co-chair of the New York-based Crowdfund Intermediary Regulatory Advocates. Others fear the act could spawn a frenzied free-for-all that leaves millions of investors light in the wallet.

The act creates an exemption that, once its rules are implemented by the SEC, will let small businesses raise up to $1 million in capital in any one-year period by selling securities without registering with state or federal securities regulators. The law, expected to take effect around January 1, 2013, will also remove restrictions on start-up companies seeking investors over the Internet. This act takes the concept of online crowdfunding-currently limited in the United States to peer-to-peer lending and donations, sometimes in exchange for token rewards-to a whole new level.

Some view the JOBS Act as the most revolutionary change in securities laws since the securities acts of 1933 and 1934. Under the crowdfunding rules, companies seeking funding must be vetted by an intermediary, which is registered by the SEC either as a broker-dealer or a funding portal.

This creates a major opportunity for financial advisors to partner with crowdfunding portals, which are prohibited from providing investment advice themselves, Klein asserts. Any portal deciding to offer investment advice to individuals or a subjective review of the issuing companies would need an investment advisor to review the deals.

Klein doubles as founder of the 1-year-old Cincinnati-based technology platform SoMoLend. Currently, SoMoLend is exempt from securities regulation because it focuses only on commercial loans from commercial lenders. But it expects to roll out debt-only crowdfunding opportunities in 2013. Expect crowdfunding platforms to move into factoring, merchant services financing, equity and everything from convertible notes to preferred stocks, she predicts.

Opportunities and perils abound. "An investment advisor could be reviewing deals on the front end, determining suitability of investors for deals and offering individualized advice," Klein says. The new law, she adds, could allow advisors to significantly increase their book of business, get new clients they've never had access to and give their current high-end investors access to new deals.

It would also give advisors entirely new portfolios to manage. However, it unclear that most advisors will have any desire to enter this wild, wild West of a market.

If a crowdfunding platform offered subjective advice about issuers, though, Klein says that, according to the SEC and Finra, investment advisor regulations would quickly kick in.

The JOBS Act does limit the amount individual investors would be able to invest through crowdfunding in any one-year period:
  For investors with an annual income or net worth of less than $100,000: the greater of $2,000 or 5% of the investor's annual income or net worth (excluding the investor's primary residence).

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