The proposed US legislation on "crowd funding" could open the door for scam artists and fraudsters to misuse the scheme, warns an investment expert.

 

“Crowd funding” refers to the funding of a company by selling small amounts of equity to many investors. This form of crowd funding has recently received attention from policymakers in the US with direct mention in the Jobs Act, a legislation that allows for a wider pool of small investors with fewer restrictions, says Grace Century’s director of research, Scott Wolf.

 

The Act was signed into law by President Obama on April 5, 2012. The US Securities and Exchange Commission (SEC) has been given approximately 270 days to set forth specific rules and guidelines that enact this legislation, while also ensuring the protection of investors.

 

"Crowd funding” has been used recently in the UK, and in theory, levels the “playing field” by giving the smaller investor a chance to get into “ground floor “opportunities, early in a firm’s life. Most investors will agree that the people who “get in” early have the greatest opportunity for profit. The flip side to this is that this is when the risk is the highest. Most firms don’t last 5 years and many do not succeed, says Wolf.

 

The scheme is centered around “on-line” platforms that small investors can put as low as $100 into posted business plans.

 

While in theory it makes sense to provide badly needed funding to fledging start-ups, it opens the door to, at worst, scam artists and fraudsters, and at best; poor oversight and accountability.

 

"Crowd funding is considered a potential boon to start-ups but potential misuse could spell trouble for unsophisticated investors,” Wolf says. - TradeArabia News Service