Crowd funding could come back to bite broker-dealers

Crowd funding could come back to bite broker-dealers
Risks include lack of information, new reporting standards, Abshure says
OCT 23, 2013
New laws that ease restrictions on raising money for small, private companies could come back to bite the securities industry. That was the assessment of Arkansas Securities Commissioner Heath Abshure, who spoke on Thursday morning in Austin, Texas, at a conference of plaintiffs attorneys. Top-of-mind among state securities regulators was the new crowdfunding law, said Mr. Abshure, who was speaking on a panel at the annual Public Investors Arbitration Bar Association. Broadly, crowdfunding — enshrined in the Jumpstart Our Business Startups Act — allows small, private companies to sell equity directly to investors. A crowdfunding equity raise can have an unlimited number of investors but it can raise only $1 million. How clients eventually hold these private, illiquid securities could turn into a big problem for broker-dealers in the near future, Mr. Abshure said. “Broker-dealer clients will buy these shares, not from the broker-dealer but directly” from the seller, he said. “Clients will return to the broker-dealer and say, 'I want to put this in my account, and perhaps borrow against it.' ” In addition, changes in reporting standards for such securities have the potential to keep investors in the dark, Mr. Abshure said. “Companies will stay private, and information will be in the dark,” he said. With an explosion of private placements and crowdfunding, companies will stay smaller longer and more people will hold these securities, Mr. Abshure said. “Exchanges could develop with trading of companies that lack public information,” he said. That creates opportunities for insider trading based on volume, not real data, he added. According to the panel, the North American Securities Administrators Association sees a series of new threats to investors. Those include crowdfunding and Internet offers, scam artists using self-directed IRAs to mask fraud, and Visa schemes. Mr. Abshure is the new president of NASAA. Persistent threats include gold and precious metals, risky oil and gas drilling programs, promissory notes, real estate investment schemes, Reg D/Rule 506 private offerings and unlicensed salesman giving liquidation recommendations, according to NASAA.

Latest News

'Bogged down' advisors just want to have fun (again)
'Bogged down' advisors just want to have fun (again)

Jim Cahn, of Wealth Enhancement Group, lifts the lid on his firm's partnership model, his views on RIA M&A, and the widely slept-on reason why advisors are merging into larger organizations.

Vestwell unveils new emergency savings account offering
Vestwell unveils new emergency savings account offering

The fintech firm is cementing its status in the workplace savings space with its latest ESA offering, which employers can integrate into their existing benefits package.

'Money Mimosas' and other ways to show your Valentine financial love
'Money Mimosas' and other ways to show your Valentine financial love

Wealth managers offer unique ideas for couples to grow closer emotionally and financially.

Limra research finds financial confidence on the rise among Black American workers
Limra research finds financial confidence on the rise among Black American workers

Survey findings suggest increased sense of financial security and more optimistic 2025 outlook, while highlighting employers' role in ensuring retirement readiness.

DOGE efforts sideswipe muni bonds backed by federal lease payments
DOGE efforts sideswipe muni bonds backed by federal lease payments

Falling prices for some securities within the $4 trillion state and local government debt market spotlight how the push to shrink spending is sending shockwaves across the US.

SPONSORED Record growth: Interval funds emerge as key players in alternative investments

Blue Vault Alts Summit highlights the role of liquidity-focused funds in reshaping advisor strategies

SPONSORED Taylor Matthews on what's behind Farther's rapid growth

From 'no clients' to reshaping wealth management, Farther blends tech and trust to deliver family-office experience at scale.