Sharon M. Davison

Archive for the ‘Capital Formation’ 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.

A New View On Crowdfunding

In Capital Formation, Crowdfunding, Portals on April 25, 2012 at 3:10 pm

Last week I attended an all-day conference on crowdfunding, sponsored by DealFlow Media. I must admit I was skeptical that they could keep my interest for the whole day. They did and then some. I want to share a few of the things I took away from the conference.


I gained a better sense of who the ideal issuer is for crowdfunding. First I think the existing crowd of creative issuers may float between the nonprofit and profit crowds. If you are a young start-up movie maker the non-profit crowd with a tee-shirt to the investor may make the most sense. But as you begin to make a name in the independent film world, or any creative endeavor, a for profit crowd might find an investment of interest. The second type of issuer is the local business—corner gourmet grocer, bakery, clothing store. These are small business people who are not going to turn into large chains but want to provide a living for themselves and their families.

Does this mean that an issuer might not move up the capital formation chain? Certainly some issuers may in fact find that the local gourmet grocer finds traction and is a chain someday.


I think I had assumed along with others that people looking to invest in the crowd were going to think this was the same as investing with their broker. What I found at the conference was that investors in the crowd while hoping for a profit also have benevolent interest in the investment. That interest could be in helping underserved communities get the seed money to start a business, an interest in the arts, or an interest in helping an enterprise with which they transact business. I was told by Sherwood Neiss, Co-Founder of The Startup Exemption, that the average investment in the crowd is expected to be around $80.  An individual investing $80 is not expecting to negotiate terms or to make a huge profit.


I think the most interesting group of people I met at the conference where those who are going to be running the funding portals. Contrary to what the general expectation has been of the “shady” character selling securities out of the back room of a bar, the people I met were intelligent, financially savvy and fully committed to providing a fair and fraud free environment for both the issuer and investor.

Final Thoughts

I think the next 9 months are going to be interesting. The SEC can over regulate this new industry or it can work with it to provide a new and different type of capital formation mechanism for companies that heretofore have not had access to capital other than through loans from banks that have been reluctant to lend.

I still think that this industry needs regulation but as with all new industries that are now computer and social networking based we have to be aware that the regulations fit the technology and the concept behind the innovation.

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