Sharon M. Davison

Posts Tagged ‘Portals’

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.


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.

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.