Private Business Counsel

Ernest Holtzheimer contributed to this blog post. Holtzheimer is a 3L at Drexel University Thomas R. Kline School of Law, concentrating in business and entrepreneurial law.

On February 16, 2016, the SEC’s Office of Investor Education and Advocacy issued an investor bulletin relating to securities-based crowdfunding, which permits the general public to participate in early-stage equity offerings (subject to certain limitations).  The bulletin provides helpful guidance, in a question-and-answer format, on a variety of topics, including the following:

• Investment limitations;
• Calculating investor net worth;
• How to make crowdfunded investments; and
• Risks involved in early-stage investments.

The SEC also highlights certain risk factors that are more acute in crowdfunded offerings, including the following:

• Investments in unproven entrepreneurs  – like any early stage investment, crowdfunded investments are investments in people as much as – and typically more than – investments in assets.

• Risk of fraud – any system of investment that permits general public participation is subject to risks of fraud.  That risk is heightened in early-stage public investing.

• Lack of professional guidance.  – crowdfunded companies will typically not get the benefit of the professional advice that traditionally funded early stage companies receive from angel and venture capital investors.

Overall, the SEC is providing simple yet critical advice to potential participants in crowdfunded investments:  do your homework before investing.