Understand Your Rights When Crowd Investing
According to the SEC ruling, investors in crowd funded equities are entitled to disclosures not just from issuing companies, but also from the crowdfunding portals themselves.
The following is for educational purposes only and does not constitute legal nor investment advice. Educate yourself on the disclosures you are entitled to, but always seek advice from a qualified professional before making an investment decision. This is not an exhaustive analysis of the ruling, but a summary of the disclosures to provide readers with a baseline understanding of their rights to disclosure
The crowdfunding platform themselves must offer investors educational materials on the details of crowd investing. Thankfully, the rule requires they be written in plain language, meaning the incomprehensible drivel that lawyers usually write to protect companies shouldn't make its way into the materials. Educational materials must, at the minimum, require information about:
- The process for investing in securities through the portal
- Risks associated with this type of investing
- Types of securities available on the platform and their associated risks
- Restrictions placed on you ability to resell the securities
- Information that is required to be provided
- Limits on the amounts you may invest
- You rights and limitations for cancelling your investment commitment
Although a lot of it will be repetitive, it will still be important to read any updates to the documents each time you invest. Aside from it being a good personal policy to re-familiarize yourself each time you invest in high-risk investments, the materials may have changed since the last time you read it.
As this brand new territory for the funding portals, the SEC, and the courts, changing regulations and lawsuits are likely to emerge quickly and often. As a result, information related to your rights, protections, risks, and even the process might have changed since the last time you invested. The difference of a few months could be huge in this space. The law even states that the crowdfunding platform is required to verify that you demonstrated an understanding of the risks. So there could be a test involved.
Additional disclosures about the Platform are also required including the legal name of the company, the SEC file number and Central Registration Depository number. The disclosures also include the amount of compensation the platform receives for being the intermediary.
In a surprising show of understanding of internet culture, the SEC included in the ruling a requirement that intermediaries provide investors with channels of communication where they can communicate with other investors and representatives of the company. Funding portals would also be prohibited from participating in these channels. The crowdfunding site could limit the size or scope of communication, and can delete abusive or fraudulent posts, but otherwise is barred from participating in communication.
The community communication would also be required to be publicly available. The SEC further created transparency of posters by requiring posters to disclose if they are a founder or employee of the company engaged in promotional activities.
Learn More About Crowd Investing on PurposefulFinance.org
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