Crowdfunding a New Danger for Clients?

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BY: KENNETH CORBIN,  The SEC voted unanimously in October to advance rules that would permit startup businesses to cast a wider net in raising capital through online crowdfunding portals. The proposed rules set the stage for what could look like a tempting new investment opportunity.

Startups could raise up to $1 million in a 12-month period from unaccredited investors, although levels of contribution would be capped by their income or net worth. Under current law, the sale of securities to individuals is limited to accredited investors with a net worth of more than $1 million (excluding their home) or those who earn $200,000 or more per year.

While the proposal is far from finalized, some advisors worry that the new rules could inspire irrational enthusiasm among clients who envision getting in on the ground floor of the next Facebook or Twitter. Investors who like an idea but have no experience working with startups could easily overlook a weak financial statement, a dubious business model or something more nefarious, warns Patricia Powell, founder and CEO of the Powell Financial Group. “I have a lot of concerns,” she says. “You can’t even imagine how many opportunities there might be for fraud with this kind of scenario. Advisors are going to spend a lot of time trying to keep people away from this.”

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