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BLOG: Six Things To Know About Crowdfunding in PA

By: Robin L. Wiessmann, Secretary of Banking & Securities

May 17, 2016

Beginning May 16, Pennsylvania investors and businesses are able to buy and sell shares of companies through crowdfunding according to federal Securities and Exchange Commission (SEC) rules. These rules create “equity crowdfunding,” a non-traditional way for small businesses and start-up companies to raise capital over the Internet by offering equity, or ownership interest, in the company to investors.

What is crowdfunding?

Crowdfunding is a way for an organization, company or individual to raise money over the Internet for a cause, a project, a service or a product. Until recently, crowdfunding has been used only to raise contributions over the Internet. Individuals who contributed did so because they wanted to support a project or product — without expecting any type of substantial financial return. For example, individuals would contribute to support an artist’s or non-profit’s project, or to support the launch of a small business that could help revitalize a town’s economy or a product they want to see on the market.

How do the new federal regulations impact crowdfunding in Pennsylvania?

“Equity crowdfunding” is a non-traditional way for small businesses and start-up companies to raise capital over the Internet by offering equity, or ownership interest, in the company to investors. Beginning May 16, 2016, these new SEC rules will enable Pennsylvania investors and businesses to buy and sell shares of properly registered or exempt companies using crowdfunding.

What you should know before investing in equity crowdfunding?

The Department of Banking and Securities is reminding Pennsylvania investors and businesses interested in buying and selling shares in companies through crowdfunding that these offerings must be conducted through a broker-dealer or a funding portal that is registered with the Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Agency (FINRA).

A word of warning

Businesses cannot advertise or make equity crowdfunding offers in Pennsylvania without federal exemption from Pennsylvania law. Also, not all companies whose offerings will be found on crowdfunding websites will succeed, nor will all have sound business plans, and some may not even be legitimate operations.

The bottom line

Like all forms of investing, equity crowdfunding involves risk. Consumers should ‘investigate before you invest’ and businesses must be appropriately registered or granted exemptions.

It is important for investors to do their homework and/or seek trusted professional advice before investing money in an equity crowdfunding opportunity.

Additional resources

Investors and businesses are urged to visit the FINRA website and the SEC’s online EDGAR database for more information on crowdfunding portals and to ensure that the portals and broker-dealers offering shares through crowdfunding are properly registered.

And as always, members of the public can contact the Department of Banking and Securities consumer hotline (1-800-PA-BANKS) to file a complaint or ask questions about financial products, transactions, or companies.

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