BizTech Law Blog
In a previous blog post, we discussed the key highlights of the new Title III crowdfunding rules. In short, businesses are now permitted (subject to certain rules and restrictions) to use equity crowdfunding to offer and sell securities to non-accredited investors.
One of the key investor protections of Title III is that crowdfunding transactions must take place through an SEC-registered intermediary – either a funding portal or a registered broker-dealer. Broker-dealers are likely to be hesitant to serve as an intermediary in a Title III crowdfunding campaign. The reason is that broker-dealers are subject to extensive rules and regulations. Broker-dealers usually pass along their regulatory compliance costs to customers. However, Title III crowdfunding campaigns involve such small amounts (i.e., $1 million or less) that broker-dealers will likely find it unprofitable to serve the market.
Enter the funding portal. A funding portal is a new type of SEC registrant created to facilitate crowdfunding transactions. Compared to broker-dealers, funding portals enjoy a streamlined SEC registration process and have paired down regulatory compliance burdens. A funding portal must: (A) register with the SEC as a funding portal, and (B) gain membership in a national securities association (i.e., FINRA). Funding Portals register with the SEC by filing Form Funding Portal. The Form Funding Portal requires the disclosure of information consistent with, but less extensive than, the information required for broker-dealers on Form BD. In summary, the Form Funding Portal includes information concerning the funding portal's principal place of business, its legal status and disciplinary history, business activities, and the type of compensation that the funding portal would receive.
Subject to certain exceptions, the table below summarizes the key prohibitions and requirements impacting funding portals.
| Funding Portals are prohibited from: | Funding Portals are required to: |
| Offering investment advise or making recommendations | Provide investors with educational materials |
| Soliciting purchases, sales or offers to buy securities offered or displayed on its platform | Take measures to reduce the risk of fraud |
| Compensating promoters and others for solicitation or based on the sale of securities | Make available information about the issuer and the offering |
| Holding, possessing, or handling investor funds or securities | Facilitate the offer and sale of crowdfunding securities |
Please contact the author if you have questions about crowdfunding or funding portals.
Shareholder and Firm TreasurerNicholas focuses his practice in the areas of Michigan non-property tax disputes, business entity selection, corporate transactions, and information technology.
