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Are there risks for small businesses with crowd funding?

As many people across the nation are aware, President Barrack Obama signed the Jumpstart Our Business Startups Act, which amends several provisions of the federal securities laws and allows small-businesses the ability to borrow small amounts of money from multiple lenders instead of attempting to gain a larger loan from other sources.

This seemed to be good news for small businesses in Texas, but regulators, litigators, academics and journalists are concerned that the potential for fraud within the crowd funding model may outweigh the promise of new financing for legitimate startups.

According to one litigator, the problem stems from whom small businesses may be getting their investments from. Traditionally, most small businesses get their investments from family, friends and associates-people the owner is familiar with and whom the owner is likely not to cheat. In crowd funding, however, the risk of fraud increases because the pool of potential investors consists of people with little to no personal relationship to the business owner.

Though several amendments have been introduced to call attention to fraud prevention, small-business owners may still find themselves in difficult situations in regards to securities offerings.

According to the new statute, issuers are required to raise $100,000 or more to retain at least two outsiders: a financial intermediary and an independent accountant. The intermediary must be properly registered with the government and is responsible for, among other things, obtaining a background and securities enforcement regulatory history check on each of the issuer's officers. The accountant is then responsible for reviewing the issuer's financial statements. If the amount garnered through the crowd funding process exceeds $500,000, the accountant must the statements accordingly. It is then up to the issuer to compensate the two people for their professional services.

The hope with this new statute is to prevent much of the fraud that occurs in crowd funding by making sure business owners are held accountable to securities law.

Source: Thomson Reuters News & Insight, "Crowdfunding: Small-business incubator or securities fraud accelerator?" Lyndon M. Tretter, Aug. 22, 2012

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