How is Crowdfunding firms work?

Even though we just looked at concerns for non-accredited purchasers in Reg D private placements, anyone can invest in a "crowdfunding" securities offering. Because of the risks involved with this type of investing, however, investors are limited in how much they can invest during any 12-month period.

The limitation depends on net worth and annual income. If either the investor's annual income or net worth is less than $100,000, then during any 12-month period, he can invest up to the greater of either $2,000 or 5% of the lesser of his annual in¬come or net worth.

If both his annual income and net worth are equal to or more than $100,000, then during any 12-month period, an investor can commit up to 10% of annual income or net worth, whichever is less, but not to exceed $100,000.

As when determining who is and is not an accredited investor, the value of the investor's primary residence is not included in the net worth calculation. In addition, any mortgage or other loan on a primary residence does not count as a liability up to the fair market value of the home.

Companies may not offer crowdfunding investments to investors directly. Rather, they must use a broker-dealer or funding portal registered with the SEC and a member of the Financial Industry Regulatory Authority (FINRA).

Investors open an account with the crowdfunding intermediary to make an investment, and all written communications relating to the crowdfunding investment will be electronic.

Before an investor can make a crowdfunding investment the broker-dealer or funding portal operating the crowdfunding platform must ensure that he reviews educational materials about this type of investing. In addition, the investor must positively affirm that he understands he can lose the investment, and that he can bear such a financial loss.

Investors also must demonstrate they understand the risks of crowdfunded investing. The sharing of views by the crowd is considered by some to be an integral part of crowdfunding. Broker-dealers and funding portals, through their crowdfunding plat¬forms, are required to have communication channels transparent to the public. For example, on an online forum relating to each investment opportunity.

In these channels, the crowd of investors can weigh in on the pros and cons of an opportunity and ask the company questions. All persons representing the company must identify themselves.

Investors have up to 48 hours prior to the end of the offer period to change their mind and cancel their investment commitment for any reason. Once the offering period is within 48 hours of ending it is too late to pull out. However, if the com¬pany makes a material change to the offering terms or other information disclosed to investors, investors are given five business days to reconfirm the investment commitment.

Investors are limited in their ability to resell their investment for the first year and may need to hold for an indefinite period.

Unlike investing in companies listed on a stock exchange where investors can quickly and easily trade securities on a market, crowdfunding is similar to holding a direct participation program interest. To sell the investment an interested buyer must be located.


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