Sharon M. Davison

Archive for the ‘Broker-Dealers’ Category

Crowdfunding Is Here

In Broker-Dealers, Capital Formation, Crowdfunding, Portals, SEC on May 18, 2016 at 10:54 am

When I started this blog many people laughed and said we would never reach a day when you could raise money over the Internet. Well many of those same people started to call me when their clients started to ask questions about crowdfunding. The initial wave came after the JOBS Act allowed general solicitation and advertising for private offering of securities to accredited investors. But slowly I started to get calls about the newly proposed crowdfunding for small issuers to the general public.

So here we are. Yesterday May 17, 2016, 17 companies filed to raise money via crowdfunding. Each company had to file a Form C with the SEC and all offerings must be through a FINRA registered funding portal or a broker-dealer qualified to engage in crowdfunding.

I am going to look into where the money is being raised. As you know I have not looked favorably on funding portals. But let’s see what the companies think.

Please feel free to share your thoughts on crowdfunding. Also check back here as this new sector moves forward.




What is the benefit of a funding portal?

In Broker-Dealers, Capital Formation, Crowdfunding, FINRA, Intermediaries, Portals, SEC on February 4, 2016 at 3:40 pm

So the question that must be answered, with the approval of the FINRA funding portal rules by the SEC, is: What is the benefit of being a funding portal?

I am not questioning the benefit of crowdfunding. The issue here is why not just register a broker-dealer.

The new rules are billed as providing for the creation of limited purpose entities that are easier to create and maintain than a broker-dealer. However, the new rules look and feel very much like existing FINRA rules for the registration and regulation of broker-dealers. In fact the release (Reg. Notice 16-06) uses the existing registration rules as the reference point for understanding the funding portal rules.

The membership process includes the filing of Form FP-NMA. There is even the requirement for a membership interview, however, it may be held as a video conference. Should you decide to sell your FP there is also a change of control application. The time for the approval of a FP is shorter and the rules require a decision within 60 days of the filing of the application.

Once the FP has been approved by FINRA, the standard of conduct rules and compliance requirements are very similar to those of a broker-dealer. Funding Portal Rule 300(a) requires a FP to maintain a system of supervision that is reasonably designed to achieve compliance with the applicable rules and regulations. Yes you will be required to have written supervisory procedures.

FINRA will also come to visit you and send written inquiries about your activities. (Rule 300(a)(2)).

So back to the original question. What is the benefit of being a funding portal? It is clear that while streamlining the number of rules and the length of forms, the infrastructure that is required to run the FP compliantly will not be that different than a broker-dealer and you won’t be able to perform all of the services of a broker-dealer.

Also I have only outlined the FINRA rules, the rules that the SEC has in place in Regulation Crowdfunding will also have to be complied with. They cover due diligence with respect to issuers, education of investors and handling of investor funds.

Click here for the FINRA page on Funding Portals. Click here for the SEC Regulation Crowdfunding.

Back and Moving On

In Broker-Dealers, Crowdfunding, FINRA, Portals, SEC on May 21, 2013 at 1:23 pm

I have been missing in action while I settled into my new law firm. Crowdfunding LawBlog is going to take a rest. Continue to follow my Twitter list on Crowdfunding. For information on broker-dealers and crowdfunding follow Broker Dealings: A Broker-Dealer Law Blog.

FINRA Tackles Crowdfunding

In Broker-Dealers, Crowdfunding, FINRA, Intermediaries, Portals, SEC on July 9, 2012 at 5:35 pm

While the summer overheated the whole country and the SEC was telling Congress that they would be late on the rules that they are required to write under the JOBS Act, FINRA issued a notice, Regulatory Notice 12-34, Jumpstart Our Business Startups Act: FINRA Requests Comment on Proposed Regulation of Crowdfunding Activities.

I must admit this was a surprise. Everyone I know who cares about the JOBS Act was fully expecting FINRA to issues rules on the interaction of investment bankers and research analysts. The FINRA rules on this are in violation of the mandate in the JOBS Act to not have any rules that do not allow research analysts to among other things participate in road shows for “emerging growth companies”. Also while it was assumed that FINRA would be the self-regulatory agency for crowdfunding without a clear mandate from the SEC it was not clear that the final decision had been made. In Notice 12-34, FINRA clearly states that they have been in conversation with the SEC and it was suggested that FINRA write its own crowdfunding rules separate and apart from the SEC.

This development could work to the advantage of crowdfunding platforms. There has been a fear that given the SEC’s backlog in rule making stemming from Dowd-Frank and now the JOBS Act, that crowdfunding would get pushed well into 2013. But if FINRA is already working on its rules then even if the SEC misses its deadline and the rules do not come out until the later part of the first quarter of 2013 FINRA will already be a long way towards completion of its rules.

Also this notice is the first indication of where regulators might be headed with respect to intermediary regulation. In Notice 12-34, FINRA states that it is writing “new” rules for funding portals and reviewing “existing” rules for broker-dealers. The issues for each are also different. Comments are requested in the following areas:

Funding Portals:

  1. Supervision
  2. Advertising
  3. Anti-money laundering
  4. Fraud and manipulation
  5. Just and equitable principles of trade


  1. Relaxing existing rules for crowdfunding activities
  2. Isolate crowdfunding activities from other activities
  3. Implement the limitation on crowdfunding similar to funding portals
  4. Special conflicts, such as a registered representative referring a client to the crowdfunding portal of the broker-dealer

Comments must be received no later than August 31, 2012. Let me know some of your ideas on funding portals and broker-dealer regulation.

© Copyrighted 2012 by Sharon M. Davison. May be reused with attribution.

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.

Crowdfunding Rulemaking

In Broker-Dealers, Crowdfunding, Portals, SEC on April 16, 2012 at 2:25 pm

Sorry for all the confusion. The rulemaking timeline for the SEC is 270 days from enactment.  So what does this mean for crowdfunding? Well certainly it is not on the front burner. The SEC still has rules to write under Dodd-Frank and also shorter deadlines for rulemaking for other parts of the JOBS Act. Then there are the studies.

The crowdfunding industry will need to stay on top of the rulemaking process.


(C) Copyrighted  2012 Sharon M. Davison Reuse with attribution.

Crowdfunding Intermediaries

In Broker-Dealers, Crowdfunding, Portals on April 10, 2012 at 8:49 pm

The newly passed Jumpstart Our Business Startup Act (JOBS Act) has clarified some but not all of the issues concerning crowdfunding intermediaries. Issues that still need clarification are:

  • Will funding portal  intermediaries have a different self-regulatory organization than registered broker-dealers;
  • Will registered broker-dealers have to follow FINRA rules for private placements or just  the new crowdfunding rules;
  • Who will hold the funds invested for funding portals?
  • What will the registration process for funding portals consist of?

The Crowdfunding Leadership Group, in a letter to President Obama, dated April 5, 2012 has stated its intent to create self-regulation for the crowdfunding industry. While their proposed principles basically follow the JOBS Act requirements, they do commit to the development of a code of conduct for portals with enforcement mechanisms to punish bad actors. Would registered broker-dealers involved in crowdfunding also have to register with a new SRO?

Funding portals cannot give investment advice or hold funds. Will this give broker-dealers an unfair advantage?

The SEC has 270  days from the signing of the bill to draft the rules. At the same time both FINRA and the Crowdfunding Leadership Group need to position themselves to be the ultimate self-regulatory organization for crowdfunding in the U.S.


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


In Broker-Dealers, Crowdfunding, Portals, Technology on April 6, 2012 at 4:05 pm

With the passing of the JOBS Act of 2012, crowdfunding is now legal in the US. This site is going to be devoted to following the new regulations, new SRO and other legal issues that will impact portals, broker dealers and investors. So come back often. Until then visit Davison-LawBlog which is more broadly devoted to issues effecting broker-dealers, investment advisers and funds.

(C) 2012  Sharon M. Davison