[Continued from Regulation Crowdfunding – Part I]

Crowdfunding Requirements for Intermediaries

 The following requirements apply to both broker-dealers and funding portals acting as an intermediary in a transaction involving the sales of securities pursuant to Regulation Crowdfunding (“Regulation CF”):

  • Register with the SEC as a broker or as a funding portal.
  • Register with a self-regulatory organization (“SRO”); the only eligible SRO at present being FINRA.

In addition, intermediaries must also take reasonable steps to prevent fraud and ensure that issuers and investors comply with Regulation CF. Intermediaries may rely on representations from issuers and investors, but at a minimum, intermediaries are required to conduct background checks and securities enforcement regulatory history checks on each officer, director, and 20% owner of the issuer. The intermediaries are also responsible for electronically delivering educational materials to investors that address the risks of purchasing securities.

Moreover, as funding portals are not registered as broker-dealers, they are subject to further limitations.  Funding portals are prohibited from:

  • Offering investment advice or providing recommendations;
  • Soliciting purchases, sales, or offers to purchase securities;
  • Compensating promoters and others for solicitations; and,
  • Handling investor funds or securities.

Crowdfunding Advertising Requirements

Regulation Crowdfunding  also restricts the types of advertising or marketing that can be used for such an offering.  Issuers generally may not advertise the terms of an offering, except for providing notice to potential investors directing them to the intermediary through which the offering will be held.  The notice may only include the following:

  • A statement that the issuer is conducting an offering;
  • The name of the intermediary through which the offering is being conducted and a link directing the investor to the intermediary;
  • The terms of the offering, including the amount of securities offered, the nature of the securities, the price of the securities, and the closing date of the offering; and,
  • Factual information about the legal identity and location of the issuer.

Accordingly, it is imperative that issuers tailor their communications to comply with Regulation CF.

As can be seen from the above, Regulation Crowdfunding places considerable requirements on both issuers seeking investment through crowdfunding and the intermediaries who assist them.  It is critical that you are aware of such obligations prior to embarking into this new arena of online fundraising. For more information on crowdfunding, check out our other blogs on the topic.