Q&A about crowdfunding investing

By Joyce M. Rosenberg
AP Business Writer

NEW YORK (AP) - Crowdfunding investing that became available to individual investors on May 16 is brand-new for many people. Here are some questions and answers about this way of buying stakes or debt issued by small businesses:

Q. What is crowdfunding investing? How is it different from other crowdfunding?

A. Crowdfunding investing is a way for small companies to raise money, either from equity or debt, by soliciting investors through crowdfunding websites. Many companies raise cash from sites like Kickstarter, Indiegogo and GoFundMe, but in those cases the people sending in money are often getting a product like a T-shirt - not making an investment in hopes of getting a monetary return.

Q. What companies can people invest in?

A. The companies are listed on websites authorized by the Financial Industry Regulatory Authority, an organization that creates and enforces rules for the securities industry and exchanges. A list of the FINRA-approved sites is on its website, www.finra.org . Search for "Crowdfunding and the JOBS Act: What Investors Should Know;" that page contains a link to a list of crowdfunding websites.

On each of the websites is a list of the companies that are raising money through crowdfunding. Each company has information about itself and a link to documents containing financial information it was required to file with the Securities and Exchange Commission. People might also see ads from the companies on social media services like Facebook or Twitter, but the ads are not allowed to disclose any information about the investments.

Q. I don't see many companies on the sites. Why not?

A. Many companies - and investors - seem to be waiting to see if this is a process worth their while. Many investors also may not know yet that this is an option. Moreover, the crowdfunding websites are being choosy about the companies they list - they want businesses that can successfully attract investors. Their hope is that a series of successes will draw more interest.

Q. Are there restrictions on what I can invest?

A. Yes. The regulations that govern crowdfunding place limits on what people can invest; the level depends on an individual's income and net worth. For example, someone with income of $30,000 and a net worth of $105,000 can invest up to $2,000 in a 12-month period. Crowdfunding websites must reasonably believe that investors aren't committing more money than they can afford to lose. In some cases, especially when someone wants to invest a significant amount, a site may ask them to provide financial information.

Each company sets the minimum investment. The smallest investment is $100.

More information about this and other aspects of crowdfunding investing is also on the SEC's website, www.sec.gov . Search for "Investor Bulletin: Crowdfunding for Investors."

Q. Is there a deadline by which I need to invest?

A. Yes. The companies will be listed on the crowdfunding websites for 90 days. At that point, if a company hasn't reached the minimum amount of money it hoped to raise, it must return funds to investors.

Q. Is owning these investments like holding shares in a company listed on the New York Stock Exchange or Nasdaq, or owning a corporate bond?

A. Yes and no. You can't sell the investments at any time, as you can with more traditional stock, and you generally can't sell within the first year. You also won't have voting rights. But, as with other securities, you might not make money; you could in fact lose everything you invest.

Published: Fri, Jul 08, 2016

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