Consumers Warned Not To Invest In Online Stocks

Posted at 6:44 PM, Nov 25, 2015
and last updated 2015-11-25 19:44:41-05

The Tennessee Department of Commerce and Insurance released a warning about investing online in new start-up companies that offer stock purchases.

In May of 2016 the Federal Government will allow individual investors to go online and purchase stock in start-up companies. 

But those websites should not be up and running until the new regulations start in the spring.

"They're not permitted to sell securities until the rules take effect in May, so if they're doing so now, they're not registered with the SEC, and it's not a valid site," according to Frank Borger-Gilligan, the Assistant Commissioner for the Securities Division of the Tennessee Department of Commerce and Insurance.

Currently crowdfunding sites have been a popular way for new companies to raise capital investments.

"You're not getting an equity share of that company, you're basically getting a reward for investing," Borger-Gilligan explained. 

Starting in May small companies, or start-up companies, can go to the public to raise funds through the internet, without registering with the Securities and Exchange Commission. 

"So it allows them to draw funds from the average investor who might be interested in purchasing a small portion of a start-up company," Borger-Gilligan said.

As with any investment, you need to be careful where you are putting your money. But Borger-Giligan said that fact is even more important with online investing.

"You really have to know what it is you're investing in, you have to do your research, and you have to understand these securities are not well regulated," he said.

Also, if you purchase stock in a start-up company, it may not be very easy to sell it off once you have it in your portfolio.

"In the case of crowdfunding, there's not a secondary market to sell those shares, so you might be stuck with it," Borger-Gilligan said.

Under the new rules a company will be able to generate $1 million in investments during a 12-month period through crowdfunding.

Investors with an annual income and net worth less than $100,000 can invest up to $2,000 or 5% of their annual income during the same 12-month period.

Investors who make more than $100,000 would be permitted to invest up to 10% of their income, or net worth, whichever is greater.

The new SEC regulations have been set to officially take effect on May 16, 2016.