Yesterday, the North American Securities Administrators Association (NASAA) blasted crowdfund investing, listing it among the top dangers on its 2012 list of investor traps.
Crowdfunding in its current state is where a large group of people pool small dollar amounts to help fund ideas. Examples of rewards-based crowdfunding, which is currently legal, include sites like RocketHub and Kickstarter.
Crowdfund investing, which should be legalized under the JOBS Act but which the SEC is still writing the rules for, will allow not just donations but would enable regular people to make investments in private companies and entrepreneurs in exchange for a real stake. (Unfortunately, the SEC, which was supposed to meet on the matter today, has once again delayed the process — more on that shortly.)
The trouble with the NASAA assessment of crowdfunding fraud is two-fold: One, they used a gaming company as an example that was caught two years ago (long before crowdfunding legislation was created) and prosecuted in August. Two, they failed to mention that this so called “crowdfunding” company was funded under the old securities laws (pre-JOBS Act), which makes fraud easier to commit as they keep investments out of the public light, allowing for backroom deals and billions in losses by average American. Some commentators have suggested that Facebook is an example of this.