Sharon M. Davison

Archive for June, 2012|Monthly archive page

Funding Portals versus Broker-Dealers

In Broker-Dealers, Crowdfunding, Intermediaries, Portals, SEC, Technology on June 20, 2012 at 3:32 pm

In a continuing effort to follow the JOBS Act (the “Act”) this alert will look at the differences between funding portals and broker dealers in the crowdfunding title of the Act.

A funding portal is an intermediary in a crowdfunding transaction that is registered with the Securities and Exchange Commission but does not have the full registration of a broker-dealer. That said a funding portal can take on all of the responsibilities of an intermediary, as defined in the Act.

The intermediary must provide all disclosures required by the statute, or rules of the SEC, to the investor. These disclosures relate to the risks involved in investing in the crowd. They are also charged with providing investor education and ensuring that the investors have read and understood the disclosures. Finally, the intermediary must make sure that the investor has not invested more than the amount allowed in a 12 month period.

Additionally, it is most likely that the intermediary, or possibly some other third party, will be the mechanism for the issuers reporting with the SEC, and this will require that each intermediary maintain a compliance program to ensure that the issuer follows all of its disclosure requirements.

Because the funding portal does not have full registration as a broker dealer within the crowdfunding transaction it may not do the following:

  1. Offer investment advice or recommendations;
  2. Solicit purchases, sales or offers to buy the securities offered or displayed on its website or portal;
  3. Compensate employees, agents or other persons for such solicitation or based on the sale of securities displayed or reference on its website or portal;
  4. Hold, manage, possess, or otherwise handle investor funds or securities; or
  5. Engage in such other activities as the Commission by rule, determines.

It has been asked why anyone would register as a funding portal. The truth is until we see the final rules it will be difficult to make a determination as to which registration makes the most sense. However, given the restrictions in the Act here are a few things to consider in making a decision.

Investment Advice

Funding portals cannot offer investment advice or make recommendations. There are several issues raised with this restriction:

  1. Will funding portals be required to list every transaction that signs up for their site?
  2. If they set standards for all issuers will this be considered a recommendation if the issues meets the standards?
  3. If the funding portal only follows a particular sector is this advice?

No Solicitation

The second restriction I find a bit baffling. If a funding portal puts a list of issuers on a website are they not soliciting purchases?  It was in fact my understanding that the lifting of the ban on general solicitation was in part to allow crowdfunding.  Are there going to be restrictions on what a funding portal can say about the issuers? Will issuers be required to write their own scripts without the advice of the funding portal? If that is the case the funding portal is just a technological device.

Compensation to Employees or Agents

The third restriction limits the funding portal from paying employees or agents based upon investments in particular issuers thus eliminating any incentive for find new projects. I think the real question here is whether the funding portals will be able to collect a commission “like” fee from the issuers.

Holding Investors Funds

The fourth restriction limits the funding portal from holding investors funds. This is a carryover from the House bill which required that intermediaries not hold investors funds and required that they place them with a “qualified custodian”. The Act does not indicate where investors’ funds go. However having just participated in a crowd this week I put in information about my Amazon account and when the project was funded the credit card attached to my Amazon account was charged.

So what does this say about registration as a broker-dealer versus a funding portal? I think it depends on your goal. If you are only in this for the sake of being an angel, not unlike the present crowdfunding portals then this may work. But if you want to be inventive and/or make money, registration as a broker-dealer may be more desirable.

© Copyrighted 2012 Sharon M. Davison. Reuse with attribution.