Crowdfunding Portals, Intermediaries & Platforms – Securities Lawyer 101
The JOBS Act includes provisions to allow crowdfunding intermediaries known as “Crowdfunding Portals”, or “Crowdfunding Platforms” to assist companies with raising capital using the internet. Crowdfunding Portals will serve as attractive capital raising centers for private companies seeking to go public in need of seed capital. Crowdfunding Portals are not subject to the extensive registration requirements applicable to brokers, but they must register with FINRA and applicable Self Regulatory Organizations (“SRO”).
SEC and FINRA Regulation of Crowdfunding Portals and Intermediaries
Restrictions on Crowdfunding Portals include prohibitions from offering investment advice, soliciting transactions in securities offered or sold, compensating any employees or agents for soliciting transactions, holding, managing or collecting investor funds or securities, and engaging in activities prohibited by the SEC. Crowdfunding Portals must be either registered brokers or SEC approved Crowdfunding Portals. FINRA can enforce and examine rules specifically written for Crowdfunding Portals.
One requirement of Regulation CF is that the issuer cannot conduct the offering itself. The offering must only be conducted through a crowdfunding intermediary commonly referred to as a “funding portal.” Crowdfunding intermediaries must be registered with the SEC as a broker-dealer or as a funding portal and become a member of FINRA. An issuer is required to use only one intermediary to conduct an offering in reliance on Section 4(a)(6). The SEC has stated that it believes this helps foster the creation of a “crowd” and better serves the purpose of the statute.
The SEC also believes that for a crowd to effectively share information, having one meeting place is most beneficial for them to obtain and share information, thus avoiding dilution of the “crowd.” Limiting a crowdfunding transaction to a single intermediary’s online platform also helps to minimize the risk that issuers would circumvent the requirements of Regulation Crowdfunding.
Crowdfunding Portals must collect the Portals are required to obtain background checks on each of a issuer’s officers and directors, or any holder of more than 20% of an issuer’s equity securities.
Under the JOBS Act, Crowdfunding Portals must:
♦ Register with the SEC and any applicable SRO;
♦ Provide disclosures related to risks, as well as other investor education materials;
♦ Ensure that offering proceeds are provided to the issuer and allow purchasers to cancel orders;
♦ Make efforts to ensure that no investor exceeds individual Crowdfunding maximum investment amounts;
♦ Protect investor privacy;
♦ Not directly or indirectly compensate promoters, finders or lead generators who refer or direct investors to the offering; and
♦ Not allow Crowdfunding Portal officers, directors or partners to have a financial interest in any issuer using the portal’s services.
Crowdfunding transactions made in reliance on Regulation CF and activities associated with these transactions occur over the internet or another similar electronic medium that is accessible to the public. Such an “online-only” requirement enables the public to access offering information and share information publicly in a way that allows members of the crowd to share their views on whether to participate in the offering and fund the business or idea. Transactions must be conducted exclusively through the intermediary’s platform. This helps ensure transparency, provides for ready availability of information in one place to all investors, and promotes greater uniformity in the distribution of information among investors.
Funding portals are not permitted to physically meet with investors to solicit investments and offerings on its platform, or host launch parties. Intermediaries may engage in back-office and other administrative functions other than on their platforms.
A “platform” is defined as “a program or application accessible via the internet or other similar electronic communication medium through which a registered broker or a registered funding portal acts as an intermediary in a transaction involving the offer or sale of securities in reliance on Regulation CF of the Securities Act.
Under Rule 503(c) of Regulation CF, a person who is subject to statutory disqualification is prohibited from acting as, or being associated with, an intermediary in a crowdfunding transaction unless permitted by an SEC rule or order.
Regulation CF establishes disclosures that an issuer offering or selling securities in reliance on Regulation CF must file with the SEC and provide that filing to investors and the relevant broker or funding portal. These disclosures must be provided to the SEC on Form C.
Crowdfunding transactions are preempted from state regulation under the National Securities Markets Improvement Act (NSMIA). States can require a notice filing for the state of the issuer’s principal place of business or from where 50% or more of the aggregate amount of the offering is sold to its residents; however, in contrast to Regulation D offerings, states cannot collect filing fees on Crowdfunding transactions.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at [email protected] or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
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