I previously wrote about the new rules of the Securities and Exchange Commission (“SEC”) allowing startups to utilize crowdfunding platforms to sell an equity stake in their business to investors in exchange for working capital. As the prior post noted, all crowdfunding transactions relying on these new rules would be required to take place through a SEC-registered intermediary, either a broker-dealer or an online funding portal.
In order to clarify the complex compliance requirements for these intermediaries, the SEC recently issued a Small Entity Compliance Guide, which provides additional guidance for entities wishing to serve as an intermediary for crowdfunding transactions.
One of the requirements of Section 4A(a)(1) of the Securities Act is that each intermediary in a crowdfunding transaction must register with the SEC as either a broker-dealer or a funding portal. Funding portals register using SEC Form Funding Portal, which can be found here: http://www.sec.gov/forms. An entity operating as a funding portal must update its SEC registration within 30 days of when the information submitted on the form becomes inaccurate for any reason. Foreign entities (outside of the U.S.) must file additional documentation with the SEC, specifically Schedule C to the Form Funding Portal.
Although funding portals may now register with the SEC, it is worth noting that no intermediaries may engage in crowdfunding activities prior to May 16, 2016.
A registered funding portal is prohibited from:
• Offering investment advice or recommendations;
• Soliciting purchases, sales or offers to buy the securities displayed on its platform;
• Compensating employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its platform; or
• Holding, managing, possessing, or handling investor funds or securities.
Therefore, if you engage in, or plan to engage in, any of these activities, you must register as a broker-dealer under Section 15(b) of the Exchange Act, rather than as a funding portal. Broker-dealers register with the SEC using Form BD.
All registered funding portals are required to become members of a registered national securities association. The Financial Industry Regulatory Authority (“FINRA”) is currently the only such registered national securities association. Additional information regarding FINRA membership for funding portals is available at http://www.finra.org/industry/funding-portals.
As you can imagine, there are a plethora of additional requirements for businesses wishing to serve as an intermediary for crowdfunding transactions. For more information on these requirements—or for information on crowdfunding generally—please contact Bryan Cave.