Investment Innovations

What Investors Should Know about Crowdfunding

Amid all the buzz, it’s still ‘buyer beware’

May 16, 2016 — WASHINGTON–(BUSINESS WIRE)–Starting on Monday, May 16, investors will be able to buy securities in early-stage companies through crowdfunding.

Investors interested in taking this step should first take time to consider the risks that may be involved in investing in these small businesses, according to a new alert from FINRA, the Financial Industry Regulatory Authority.

“Crowdfunding generates a lot of buzz, and the possibility of getting in on the ground floor of the next great startup can be very tempting. But as with any new type of opportunity, investors should step back and first ask the right questions,” said Gerri Walsh, Senior VP of Investor Education at FINRA. “Investing in unregistered, emerging securities carries significant risk, and investors have to beware the attraction of the shiny, new object and make an informed, rational investment decision.”

Income & New Worth Requirements

Under new rules effective May 16, 2016, the general public can invest in capital raising by start-up companies through crowdfunding, which generally refers to the use of the Internet by small businesses to raise capital through limited investments from a large number of investors.

FINRA’s alert summarizes how equity crowdfunding works, including the income and net-worth requirements prospective investors need to meet and the information available from issuers, broker-dealers and funding portals. The alert also offers tips to help investors determine if crowdfunding is right for them, including:

the possibility of getting in on the ground floor of the next great startup can be very tempting

  • Ask yourself if you can you handle the risk—and the potential loss of your investment. Startups and early-stage ventures can and do fail. You should be able to afford to lose your entire investment. Also, be aware that you will be limited in your ability to resell your investment for the first year—and may need to hold your investment for an indefinite period of time.
  • Read and understand the educational and financial information, and all disclosures, provided by the issuer and crowdfunding intermediaries. Ask direct questions about the investment, including worst-case scenarios. Consider seeking another opinion, such as from an accountant who understands financial reports and likely has no vested interest in the investment.
  • Recognize that fraud is a possibility. Protect yourself by learning the tactics a fraudster might use—and how to avoid them. Check out investment professionals by using BrokerCheck, and go to FINRA’s Funding Portal page on that will go live on Monday, May 16.

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FINRA, the Financial Industry Regulatory Authority, is the largest independent regulator for all securities firms doing business in the United States. FINRA is dedicated to investor protection and market integrity through effective and efficient regulation and complementary compliance and technology-based services. FINRA touches virtually every aspect of the securities business – from registering and educating all industry participants to examining securities firms, writing rules, enforcing those rules and the federal securities laws, and informing and educating the investing public. In addition, FINRA provides surveillance and other regulatory services for equities and options markets, as well as trade reporting and other industry utilities. FINRA also administers the largest dispute resolution forum for investors and firms. For more information, please visit