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How to Do it Wrong in Crowdfunding

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November 24, 2014 | Blog Post
Mark Roderick

An SEC enforcement order came across my desk that illustrates how to operate a Crowdfunding portal if you want to meet people who work for the government. The order, with names removed, is available here.

As a preface, everything I know about this portal comes from the SEC’s enforcement order. It is possible that the SEC’s allegations are false – even though the portal agreed to a settlement, without admitting wrongdoing – and that the portal actually was in full compliance with all applicable laws.

With that said, here’s what the portal did, or is alleged to have done:

I can only guess this portal was represented by one of my competitors. :)

That's a joke, of course. Much more likely, the company wasn't represented by anybody and just did what seemed to make sense, without knowing they were violating anything.

The portal was incorporated and operated offshore. Nevertheless, it was subject to U.S. securities laws because it solicited U.S. investors.

Fortunately, everything this company wanted to do can be done legally and at a very low cost.  If you want to raise money exclusively offshore, then exclude U.S. investors. If you want to raise money from the U.S. and offshore, use Regulation S. If you're raising money from U.S. investors use VerifyInvestors or Crowdentials to verify they're accredited. If you're going to charge a commission use WealthForge or another online broker-dealer. If you want to allow investors to self-certify, then use Rule 506(b) and hide your deals behind a firewall. Spend just a little money on a lawyer and stay off the SEC’s Christmas card list.

For more information on Crowdfunding, including news, updates and links to important information pertaining to the JOBS Act and how Crowdfunding may affect your business, follow Roderick’s blog, or twitter handle: @CrowdfundAttny.

 

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