* State securities regulators release annual threat list
* Also highlight mid-size investment advisers, drilling schemes
By Beth Pinsker Gladstone
NEW YORK, Aug 21 (Reuters) - State securities regulators have put the relatively new investment phenomenon of crowdfunding at the top of their annual investment scams list, highlighting a recent controversial U.S. law that relaxed capital raising rules on small companies.
The North American Securities Administrators Association (NASAA) evaluated both emerging and ongoing threats to investors in its 2012 list of top investor traps, released on Tuesday.
The list of threats also included mid-size investment advisers, and oil and gas drilling schemes.
Crowdfunding, which allows fundraising for projects via websites, is relatively new, and scams are just getting started, the regulators said.
The idea is to make investment in startup ventures easily available to the masses. Portions of the Jumpstart Our Business Startups Act (JOBS Act), which go into effect in 2013, will push crowdfunding from a "donation" model to a true investment model, and that will make it even more of a lure for swindlers, NASAA said.
The JOBS Act passed Congress with bipartisan support and became law in April, but faced opposition from some Democrats and advocacy groups who said it would roll back important investor protections.
U.S. Securities and Exchange Commission Chairman Mary Schapiro and SEC commissioner Luis Aguilar have voiced concerns about various provisions.
"The number of entities out there already pitching themselves as crowdfunding entities online has risen in a significant fashion," said Matt Kitzi, NASAA Enforcement Section Chair and Missouri Securities Commissioner. "Just look at web domain names: it has gone from a couple hundred to well over 1,600 in the past year. They are staking up a position to enter crowdfunding market. There will be a lot more to come on this."
In early in August, the Massachusetts Securities Division charged a Lowell, Massachusetts man for a crowdfunding scam, bilking 20 investors who thought they were investing money in a gaming site of $153,396.
Secretary of the Commonwealth William Galvin, who brought the case, wrote to the SEC urging regulators not to let the JOBS Act changes become a tool for financial fraud and abuse. "Longstanding problems in the markets for small and speculative stocks show the pitfalls of relying on the wisdom of crowds."
The annual list compiled by NASAA is broken into two parts this year; the first is composed of emerging threats to investors. Besides crowdfunding, NASAA is worried about mid-size investment advisers, who recently transferred to supervision by state authorities instead of the SEC.
"A lot of these advisers haven't been audited in many years, if ever," said Kitzi. He adds that this item made it to the list because the investigating committee saw a large increase in complaints and enforcement actions against advisers.
"There's plenty of advisers out there who just shouldn't be in business," said Robert Stammers, director of investor education for CFA Institute, an association of investment professionals. "I think most advisers will applaud this, because they find inappropriate advice brings down the whole industry."
While new threats are emerging, existing persistent threats may be more dangerous because they involve more people, says Jack Herstein, NASAA president and assistant director of the Nebraska Department of Banking & Finance, Bureau of Securities.
The most common scam that NASAA highlights is the "Reg D/Rule 506 Private Offerings" which involves marketing investments, like oil and gas drilling, that are not registered with the SEC. The JOBS Act also relaxed regulations on this type of investment, and allowed much broader advertising of these types of investment opportunities, which NASAA says will make fraud easier.
The SEC will meet next week to discuss rules lifting the ban on general advertising for private securities as required by the JOBS Act and Herstein urged the commissioners to consider how the act affects investors. "We hope they put out some rules for comment, and that they do not give in," he says. "Hopefully the SEC is thinking of investors, and will get this done in a short period of time."
Among other threats on the NASAA list:
- Precious metals sales and investment pitches
- Fraudulent investment in distressed real estate
- Abuse of promissory notes, which are often linked to Ponzi schemes
- Scams related to self-directed Individual Retirement Accounts
- Investment-for-visa schemes
- Unlicensed salesmen giving liquidation recommendations, especially urging seniors to sell equities to buy annuities they don't need or want.