Seniors are being squeezed by declining investment income and rising costs. They’re also more Internet savvy, but susceptible to cognitive deficits. Add the prospect of investing in start-ups over the Internet with limited regulation, and what have you got? A potential nightmare for them, their families and you.
The passage of the Jumpstart Our Business Startups (JOBS) Act this past April means small businesses and entrepreneurs will be able to tap into the “crowd” for equity and debt funding. The hope is that the new law will create more jobs. But many observers believe it will open the floodgates to more investment fraud, especially targeting seniors.
The SEC has until January 2013 to write a new securities law exemption to allow crowd-funded investments. Therefore, according to the agency “any offers or sales of securities purporting to rely on the crowd-funding exemption would be unlawful under the federal securities laws.” After that point, such offerings “will not be revised by regulators before they are offered to the public,” says Jack E. Herstein, president of the North American Securities Administrators Association (NASAA) and assistant director of the Nebraska Department of Banking & Finance Bureau of Securities. “Nor will they be required to provide the same level of disclosures to investors or regulators required of securities offerings.”
Hopefully, your senior clients won’t “go off the ranch” and invest in crowd-funded securities without your input. But if they do and they get burned, their families may point the finger at you. To prevent this, warn your clients now of the dangers of crowd-funding:
• According to NASAA, all investments have risk. But small-business investments have even higher risk than normal, with about 50 percent failing within the first five years.
• Internet debt or equity issuers may lack experience. Or they may have unproven, unsubstantiated or fraudulent track records.
• Do diligence will be difficult. The only information available to investors will what is provided on the funding portal.
• State securities regulators will have no role in vetting these offerings.
• Investors may have limited legal recourse if the investments under-perform or fail.
• Crowd-funded investments will have little or no liquidity.
• Crowd-funding portals may lack the required SEC registration or fail to belong to the mandated self-regulating organization (SRO).
Now, not all crowd-funded investments will be dangerous. As the market evolves under the aegis of an SRO, they may well prove to be a godsend for seniors desperate for more income. But until rules are written and best practices emerge, great caution is in order.
Source: National Ethics Association, www.ethics.net.