This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
TheStreet Open House

Investors Lose In Crowdfunding

Stocks in this article: FPX IPOSX DXIIX IPOAX

Whenever the topic of fraud is mentioned, crowdfunding proponents immediately state that it already happens in the U.K. and that there hasn't been any fraud. They also insist that the power of the crowd will "out" any malfeasance.

Again, it goes back to what does the investor get out of this deal -- which carries a huge risk and very little chance to see any reward. Then who benefits from crowdfunding if it isn't investors?

  • Companies looking for capital get money from investors with no obligation
  • Crowdfunding portals that will earn money from listing companies, potential company profits and side revenue like job finders.
  • FINRA, which earns fees from crowdfunding portals registration -- a minimum of $15,000 for each firm

Of course, FINRA should be looking past fee-gathering and toward protecting investors, but that would require FINRA to hire more people to now police a whole new market. Unfortunately, FINRA is housed under the SEC, and the SEC is facing a funding cut of $108 million due to sequestration. The Investor Protection Fund will also be cut by $7 million. The SEC said it didn't expect furloughs or a reduction in force, but that the cuts would impact hiring and technology investment.


Other ways FINRA could protect investors would be by requiring portals to carry insurance in the event of fraud. So far, few insurance companies sound interested in providing this type of coverage.

Bob Sargen wrote in The Specialty Insurance Blog that, "We anticipate that underwriters will initially exclude capital raising activities via crowdfunding outright, or will charge an increased premium to cover this activity."

Some of the reasons they cite for not wanting to cover this activity?: claims from small investors, fraud from relaxed distribution controls and lack of knowledge leading to errors.

FINRA could provide for a marketplace of these shares after the one-year restriction. It should at least give these shareholders a chance to place some value on their investments.

FINRA could require the portals to hire supervisors just like regular broker-dealers. Of course, most websites are just now seeing their costs skyrocket -- welcome to the world of finance. FINRA could also require fraud-detection software. For now, these are just suggestions; there is currently little in the way of ideas for investor protection.

Investors need to be wary. Whenever there is a positive argument being made for an investor to crowdfund, it invariably comes from a crowdfunding company -- not a registered investment adviser and not from a registered broker-dealer. It tends to come from someone who will benefit more than the investor.

-- Written by Debra Borchardt in New York



>To contact the writer of this article, click here: Debra Borchardt.

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.
2 of 2

Check Out Our Best Services for Investors

Action Alerts PLUS

Jim Cramer and Stephanie Link reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

Jim Cramer's protégé, David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
Try it NOW
Try it NOW
Try it NOW

Check Out Our Best Services for Investors

Dividend Stock Advisor

Jim Cramer's protégé, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
Try it NOW
Try it NOW
Try it NOW
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!

Markets

DOW 17,164.95 -251.90 -1.45%
S&P 500 1,994.99 -26.26 -1.30%
NASDAQ 4,635.24 -48.1670 -1.03%

Partners Compare Online Brokers

Free Reports

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs