Title III of the Jumpstart Our Business Startups (JOBS) Act, enacted in 2012, provides guidance and regulation relating to securities offered or sold through crowdfunding activities. In 2015, the Securities and Exchange Commission (SEC) added onto this initial act by creating a new ruleset that implemented a regulatory framework for intermediaries that facilitate such crowdfunding transactions. This includes regulations for a relatively new intermediary: the funding portal. Securities Act Section 4(a)(6) (otherwise known as “Regulation CF”) requires that intermediaries in crowdfunding transactions be registered with the SEC as either a broker-dealer or a funding portal.
Who Is Required to Register as A Funding Portal?
If a firm wishes to act as an intermediary in a crowdfunding transaction and is one of the following –
- Sole proprietorship
- Limited liability company
- Other organized entity not registered as (and not intending to register as) a broker-dealer
– then the firm must register with the SEC on Form Funding Portal. However, there are certain activities registered funding portals are prohibited from participating in. If a firm engages in or plans to engage in specified endeavors, it must register as a broker-dealer, not as a funding portal.
Registered funding portals are prohibited by statute from engaging in any of the following activities:
- Paying for finding potential investors;
- Giving investment advice or recommendations;
- Soliciting offers or sales to buy the securities offered on its portal
- Compensating anyone for such solicitation or based on the sale of securities on its portal;
- Holding or managing funds; and
- Permitting their officers, directors or partners to have a financial interest in an issuer using their services.
The above notwithstanding, the SEC has proposed a non-exclusive, conditional safe harbor for funding portals that engage in certain limited activities. These activities include:
- Limiting the offerings made on or through a funding portal’s platform based on objective eligibility requirements;
- Highlighting and displaying offerings on the platform;
- Advertising the portal’s existence;
- Providing communication channels that allow the issue to communicate with investors and potential investors;
- Advising issuers on the structure and content of the offering; and
- Compensating third parties for referring persons to the portal and other services.
[Continued in Crowdfunding: Funding Portal Registration – Part II]