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Crowdfunding Intermediaries – SEC Issues Guidance

On April 5, 2012 President Obama signed the JOBS Act into law. Part of the JOBS Act is the Crowdfunding Act, the full title of which is the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012”.  The SEC has been mandated with the task of drafting the crowdfunding rules and regulations by early 2013. In addition to fashioning the exemption that will allow companies to raise funds using the Crowdfunding Act, the SEC must also fashion rules to govern the crowdfunding intermediaries that companies will be required to use in the process.

Crowdfunding Intermediaries or Funding portals (the terms are interchangeable) are hurrying up to be ready to implement rules that will be enacted in early 2013 while at the same time, waiting to find out what those rules will be.  On May 7, 2012, the SEC issued limited guidance for crowdfunding intermediaries.  As has been the case since enactment of the JOBS Act, the SEC continues to ask for public comments and input on its regulatory initiative.  The full text of the guidance discussed in this blog is available on the SEC website.

For my information on funding portals and details of the JOBS Act text related to them, please see my blog entitled Jobs Act Intermediaries – hurry up and wait.

Intermediary Use and Registration Requirements

The Crowdfunding Act amends Section 4 by of the Securities Act of 1933 (the Securities Act) to create a new exemption to the registration requirements of Section 5 of the Securities Act.  The new exemption allows Issuers to solicit “crowds” to sell up to $1 million in securities as long as no individual investment exceeds certain threshold amounts.  In addition, Section 302 of the Crowdfunding Act requires that all

Crowdfunding offerings be conducted through an intermediary that is a broker dealer or funding portal that is registered with the SEC and are members of a registered self regulatory organization (SRO).  Currently that SRO is Financial Industry Regulatory Authority (FINRA).

  • The Crowdfunding Act carves out a new class of “broker dealer” called “Funding Portals” that can act as Crowdfunding intermediaries.  Section 304 of the Crowdfunding Act provides that Funding Portals are exempt from the broker dealer registration requirements, as long as they are registered with the SEC as Funding Portals and follow all such registration and ongoing rule and reporting requirements.  In accordance with Section 304, Funding Portals must be “subject to the examination, enforcement and other rulemaking authority” of the SEC and must be a member of an SRO, such as FINRA.


Funding Portal Defined

Subject to additional requirements that the SEC may by rule draft, a funding portal is defined as a crowdfunding intermediary that does not: (i) offer investment advice or recommendations; (ii) solicit purchases, sales, or offers to buy securities offered or displayed on its website or portal; (iii) compensate employees, agents, or other persons for such solicitation or based on the sale of securities it lists; or (iv) hold, manage, possess, or otherwise handle investor funds.


SEC Guidance

The SEC guidance reminds all potential funding portals that they may not act as such until when and if the SEC has drafted and enacted the Crowdfunding rules and regulations and each funding portal has registered with the SEC.  The SEC reminded broker dealers that they are under the same restriction.  Crowdfunding is not yet legal and the SEC has issued many reminders to people to not jump the gun.

The SEC further stated the obvious, they don’t know yet what the forms or process will be for registration, as the rules have not yet been written, nor the forms drafted.

Although it is unclear if FINRA or a new SRO will ultimately act as the regulatory for funding portals, the SEC reminded us that as of today, FINRA is the only SRO in existence registered with the SEC and accordingly, unless and until a new SRO registers under Section 15A of the Securities Exchange Act, FINRA will be the regulating SRO.

The SEC set forth the general terms of the JOBS Act related to funding portals, including that a Funding Portal must:

  1. Provide disclosures, including disclosures related to risks;
  2. Ensure that each investor reviews investor education information and positively affirms that they understand that they risk losing their entire investment and can afford such loss;
  3. Ensure that each investor answers questions demonstrating an understanding of the level of risk generally applicable to investments in startups; emerging businesses, and small issuers;
  4. Ensure that each investor answers questions demonstrating an understanding of the risk of illiquidity;
  5. Take measures to reduce the risk of fraud by establishing rules and procedures including obtaining background and securities enforcement history checks on each officer, director and person holding more than 20% of the outstanding equity of an Issuer;
  6. Not later than 21 days prior to the first day securities are sold file with the SEC and make available to potential investors all disclosure information required and provided by the Issuer
  7. Ensure that no offering proceeds are given or available to the Issuer until the target offering amount has been raised and allow investors to cancel their investment during that time;
  8. Make efforts to ensure that no investor exceeds its allowable investment amount in any 12 month period, including from all Issuers, and all Funding Portals (i.e. $2,000 or 5% of annual net income or net worth if net income or net worth is less than $100,000 or 10% of annual income or net worth up to $100,000 if annual income or net worth is over $100,000)
  9. Take steps to protect the privacy of information collected from investors;
  10. Not compensate promoters, finders, or lead generators for providing the broker or Funding Portal with personal indentifying information of any potential investor; and
  11. Prohibit its directors, officers or partners from having any financial interest in any Issuer using its service.
  12. Not offer investment advice or make recommendations or solicit purchases, sales or offers of securities
  13. Not compensate employees, agent, or other persons for soliciting purchases, sales or offers of securities
  14. Not hold, manage, possess or otherwise handle investor funds or securities


The Author

Attorney Laura Anthony,
Founding Partner, Legal & Compliance, LLC
Securities, Reverse Mergers, Corporate Transactions

Securities attorney Laura Anthony provides ongoing corporate counsel to small and mid-size public Companies as well as private Companies intending to go public on the over the counter market including the OTCBB and OTCQB. For almost two decades Ms. Anthony has dedicated her securities law practice towards being “the big firm alternative.” Clients receive fast and efficient cutting-edge legal service without the inherent delays and unnecessary expense of “partner-heavy” securities law firms.

Ms. Anthony’s focus includes but is not limited to crowdfunding, registration statements, PIPE transactions, private placements, reverse mergers, and compliance with the reporting requirements of the Securities Exchange Act of 1934 including Forms 10-Q, 10-K and 8-K and the proxy requirements of Section 14. Moreover, Ms. Anthony represents both target and acquiring companies in reverse mergers and forward mergers, including preparation of deal documents such as Merger Agreements, Stock Purchase Agreements, Asset Purchase Agreements and Reorganization Agreements. Ms. Anthony prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SRO’s such as FINRA and DTC for corporate changes such as name changes, reverse and forward splits and change of domicile.

Contact Legal & Compliance LLC for a free initial consultation or second opinion on an existing matter.

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© Legal & Compliance, LLC 2012

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