By Haddon Libby

Here is a commercial that you might see on the Fox Business Channel in the not too distant future:

“A $16,000 investment in Apple back in 1980 earned two Buffalo, New York grandparents a cool $2 million!  Don’t you wish you were them?  Guess what, you can be!  Invest now in Pondse Cold Fusion and you too could make millions of dollars!

Not only are you investing in a revolutionary energy source of the future, if you invest in the next thirty minutes, we will throw in this 20 piece knife set made from genuine replica Madagascar ivory.  Postage and handling extra.

Not enough you say?  For every friend that invests in Pondse Cold Fusion, we will give you ten free shares!  Act fast as supplies of stock certificates are running out fast.  Don’t miss out on this once in a lifetime investment opportunity…and 20 piece knife set.  Operators are standing by now!”

Why do I surmise that you might be seeing this kind of pitch on television?

The Securities Exchange Committee (SEC) recently finalized rules for what is commonly referred to as Regulation A+ of the JOBS Act.   As a refresher, the JOBS Act (Jumpstart Our Businesses) was passed three years ago.  The legislation was meant to make it easier for small and mid-sized businesses to raise capital, grow and hire more people.

Previously, only accredited investors could participate in these small fundraisings.  An accredited investor is someone who earns more than $200,000 a year or is worth at least $5 million.  In the United States, we have 8 million accredited investors of which only 3% or 240,000 people have ever invested in a small or “mini IPO” (Initial Public Offering).  The majority of these accredited investors do so via venture capital funds ($30 billion annually) or as Angel investors ($20 billion annually).

The rule change means that anyone can invest up to 10% of their annual earnings or net worth in these mini IPOs.  It also means that the cumbersome and expensive state-by-state approval process of the past will be streamlined via the SEC.  It is expected that this rule change will create a new class of retail investor.  It is also expected that this will create a new class of fraudster as well.

A key risk for fraud exists on fundraisings of less than $1 million – the SEC have stated that they have no intent on monitoring these stock issues.  Meanwhile, most state regulators will have limited to no ability to perform supervision.  As for the stock brokers promoting these small issuances, federal rules prevent the regulation of these stock brokers by the Financial Industry Regulatory Authority (FINRA), the regulatory agency that supervises the industry.

Given such intentionally lax supervision of an investment space filled with vastly more failures and frauds than successes, it seems curious that federal authorities are leaving such a big gap through which you and I can be defrauded with limited to no recourse against the bad guys.

Despite these substantial concerns, lower regulatory thresholds will be welcomed by people who have invested in small start-ups through Kickstarter campaigns.  To date, Kickstarter campaigns have helped people and companies raise over $1.5 billion in capital by offering future services or some other benefit in return for cash.  The downside to that approach has been that these investors have no ownership in those businesses that they help.  As an example, early Kickstarter investors in Oculus Virtual Reality were happy to see this company succeed but less thrilled that they did not participate in the $2 billion sale of the company to Facebook.

To protect yourself from this Wild West for Capital Raising, assume every investment opportunity could be a fraud and be prepared to lose every penny you invest.

Haddon Libby is Managing Partner at Winslow Drake, an investment advisory practice and co-founder of ShareKitchen.