(Reuters) - A spike in website names related to crowdfunding suggests an upcoming wave of websites through which small businesses and entrepreneurs could raise investments using the online strategy, state securities regulators said on Wednesday.
The website names have soared to 8,800 from fewer than 900 in January, according to the North American Securities Administrators Association, a Washington-based group of state securities regulators. They are proliferating as businesses await rules from the U.S. Securities and Exchange Commission for structuring crowdfunding deals, the group said.
A future surge of crowdfunding-related websites could also lead to an increase in online investor fraud, NASAA said.
Crowdfunding is a capital-raising strategy in which investors buy small stakes in ventures through various websites. It started as a way to ask many people for small amounts of money to fund everything from documentaries to community projects, often in exchange for a free service or product.
Interest in crowdfunding exploded when President Barack Obama signed the 2012 Jumpstart our Business Startups, or JOBS Act, in April. The law, aimed at boosting small business growth, legalized crowdfunding as a way for businesses to solicit private investors with the promise of potential returns on their money.
Companies, which will be able to raise up to $1 million annually using the strategy, must first wait for SEC rules to be proposed and finalized before soliciting investors. Rules are expected sometime during 2013. Businesses will be required, among other things, to conduct offerings through an SEC-registered intermediary, such as a broker or “funding portal.”
The 8,800 website names found by NASAA all included the word “crowdfunding.” About 2,000 of those are used by websites that already display content, according to NASAA. The nature of that content is unclear.
Websites for 3,700 of the names had no content, while more than 3,000 names appeared to be reserved for later use or sale. The analysis was conducted by U.S. state and Canadian securities regulators.
While many of the sites appear to have been formed by large credible organizations, “others appear to be created by individuals that may be operating out of their basements,” Minnesota Securities Director Robert Moilanen said in a statement on Wednesday. He also heads an internet fraud investigations group that NASAA created after the JOBS Act was signed to monitor crowdfunding and other internet offerings.
NASAA’s analysis and news release triggered criticism from the start-up community.
“It’s kind of alarmist. So what people are reserving domain names?” said Joe Wallin, a lawyer for Davis Wright Tremaine LLP in Seattle who represents start-up companies in financing deals.
“Everyone should know the rules aren’t final yet and that you can’t do it yet,” Wallin said. Companies that are trying to get around the prohibition would stand out, he said. “But if you have a bunch of people who are excited about it becoming legal soon, I don’t see why that’s bad.”
Some companies with active websites may be trying to circumvent the delay required until the SEC’s rules are finalized, said NASAA President Heath Abshure.
“Some websites are already engaged in some sort of activity,” he told Reuters. A flood of crowdfunding sites after SEC rules become final could also confuse investors, Abshure said. “I don’t know if legitimate offerers of securities will be heard over the din of illegitimate offerers,” he said.
Many companies and individuals that registered their site names may abandon their plans when they realize the difficulties of complying with the SEC’s rule, said William Carleton, a lawyer for McNaul Ebel Nawrot & Helgren PLLC who advises start-ups about financing.
Regulators, nonetheless, insist on vigilance.
“We do know that fraudulent activities using the internet occur on a fairly regular basis in other areas,” said NASAA’s Moilanen. “The concern is that the internet solicitation of securities is a new invention. We don’t know where this is going.”
(This story has been corrected to change the term “crowd funding” to “crowdfunding” throughout)
Reporting by Suzanne Barlyn; Editing by Chelsea Emery and Dan Grebler