FINRA Warns Investors To Beware Of Shiny New Objects

Most of us know what probation feels like. We’ve had jobs where we’ve been told “for the next so-and-so months, you’ll be on probation.”

Translation: Don’t mess up. Don’t come into work mid-morning. Don’t take three-hour lunches. Don’t ask to take a week off to visit your elderly aunt in Cancún. And do your damn job.

I thought I’d never get to say this: Equity crowdfunding has begun. Startups are already raising money from everybody – not just the moneyed – under the new equity crowdfunding rules.

It’s a new ball game. New rules. New opportunities.

Exciting? Sure. But the newness of equity crowdfunding also means it hasn’t had a chance to plant deep roots. It’s the fresh face in town, unblemished and enticing. But also without history or track record.

Through no fault of its own and because it’s so new, it hasn’t had a chance to prove itself.

Which means, like anyone starting a new job, it can’t afford to mess up.

Equity crowdfunding is on probation.

Two Schools

The buildup to May 16 revealed two schools of thought. One school thinks equity crowdfunding is a good thing – for both startups and investors.

Startups – especially those outside the cozy ecosystem of Silicon Valley – can now entertain other sources of funding besides venture capital money.

As for investors? They can diversify their portfolios with a new class of equity that provides a very different risk-return calculus.

The second school is louder and more skeptical. It thinks equity crowdfunding is dangerous.

Not only is it full of risks, but these risks are new to investors and therefore much harder to recognize and handle.

It took the government four years to figure out the regulations governing equity crowdfunding. Evidently, it wasn’t enough time. Equity crowdfunding still gives the government the shakes.

What Investors Should Know