Who Is Responsible For Crowdfunding Fraud?

In the near future, unaccredited investors are going to be able to directly invest in startup companies. Unaccredited investors are investors who do not have $250,000 in assets or make at least $250,000 a year. If an unaccredited investors falls victim to fraud, who is responsible for misleading the investor?

What Information Is Available to Consumers?

There is a lot of information that must be made available for creditors. For example, a business plan must be posted, the business structure must be made available and the reason for using the money must be made clear to investors.

There Are Two Types of Investment Firms

Two types of investment firms are available for companies and investors who would like to connect with each other. Both type of firms are registered with the Securities and Exchange Commission (SEC) before they are allowed to do business. However, they are given different treatment under the law. A broker-dealer is allowed to act as a middleman between the two parties that vets and confirms information before it is passed along to investors. Funding portals are not allowed to do much other than list available investment opportunities.

The CrowdSourcing Portal Is Sued

In most cases, the funding portal that facilitates the transfer of money from the investor to the company is held liable for fraud if any misstatements are made to the investor. However, these portals cannot do much to verify the facts and information being given out to investors. All they can do is list the information that they are given and hope that it is true.

Vetting Information Could Be Seen as Investment Advice

The reason why these portals are not allowed to vet the information given to them is that it would constitute investment advice according to the law. Therefore, the funding portals are only allowed to verify that companies are disclosing the information that the law requires them to disclose. As long as the information is there, the funding portals must allow the investment opportunity to be listed.

What Happens If a Company Legitimately Fails?

It is unclear under crowdsourcing regulations what the difference is between fraud and a company that goes under for legitimate reasons. A shift in the economy, lower than expected demand or simple incompetence could cause a company to ask for things it doesn’t need or fail to provide a solid return on an investment. However, this does not necessarily constitute fraud. This is a question that investors, crowdsourcing sites and the government will have to work on in the future to protect those who may face frivolous lawsuits.

Crowdsourcing is an excellent way for startups to get the money that they need without having to ask a bank or a traditional investor for a loan. It allows those who want to invest a little bit of money in a new company to see a return on their investment instead of just donating the money. As the system evolves, it will have to issue clearer guidance to ensure that the line between a risky investment and outright fraud is a clear one.

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Michael Layer is a blogger for StartupValley. He enjoys blogging about crowd source funding trends and news.

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