RICHMOND — Equity crowdfunding offers an effective way for small businesses and startups to raise capital and provides individual investors with an opportunity to invest in business ventures at the ground level. The State Corporation Commission (SCC) urges Virginians to carefully review equity crowdfunding investment opportunities which can be riskier than traditional securities offerings due to less disclosure and limited regulatory oversight.
Equity crowdfunding is now used by small businesses to raise capital online through investments from a large number of investors. The federal Jumpstart Our Business Startups (JOBS) Act exempts investment crowdfunding from securities registration laws thus easing restrictions on start-up companies that use the internet to find investors to finance their business ventures.
Investments in these offerings are subject to limits depending on an investor’s annual income or net worth. Individuals can invest amounts ranging from $2,200 to $107,000 annually depending on their income and net worth. Under federal law, offerings must be conducted online through a broker-dealer or funding portal. Under federal crowdfunding rules, businesses can raise up to $1.07 million annually across state lines from individual investors without prior approval from the Securities and Exchange Commission.
Many states, including Virginia, have enacted intrastate crowdfunding laws. Small businesses in those states have the option of using state-based crowdfunding exemptions to raise capital from investors within jurisdictional borders. Under state crowdfunding laws, businesses can raise money from local investors directly or through a broker-dealer or funding portal. The amount a business can raise, and individual investment limits, are determined by each state’s crowdfunding laws. Virginia law allows companies to raise up to $2 million annually through crowdfunding. Under Virginia law, individuals can invest a maximum amount up to $10,000 for each crowdfunding investment unless they are an accredited investor.
“Equity crowdfunding makes it easier for small businesses and startups to raise capital, but it also increases the potential for investor harm,” said Ron Thomas, director of the SCC’s Division of Securities and Retail Franchising. Thomas urges Virginians to fully understand any investment offering before investing.
Thomas offers the following tips:
- Understand and accept the risk and potential loss of your investment. Small businesses, startups and early-stage ventures are particularly risky. There is often very little publicly available information about these businesses.
- When you see an investment opportunity on the internet – whether on a funding portal, in an online newsletter, message board or chat room – do your homework. Read and understand all information and disclosures provided by the issuer and crowdfunding intermediaries.
- Recognize that fraud is a possibility. Check out any investment opportunity and the people offering it.
- Beware of crowdfunding portals or other online intermediaries claiming to have an accreditation or “seal of approval” from a standards program or board. These may not be legitimate.
Investors with questions about crowdfunding offerings or the people offering them should contact the Division of Securities and Retail Franchising before investing at (804) 371-9051 (in Richmond) or 1-800-552-7945 (toll-free). For more information about the crowdfunding provisions of the federal law, visit the North American Securities Administrators Association (NASAA) website at www.nasaa.org
or the SEC website at www.sec.gov.