In a previous blog related to Regulation Crowdfunding, we discussed the basics of conducting an equity crowdfunding campaign, as well as the benefits crowdfunding can provide to businesses and investors. One important participant in every crowdfunding campaign are the online platforms through which all campaigns must be conducted, in accordance with the Jumpstart Our Business Startups Act (“JOBS Act”). These platforms, typically referred to as “funding portals” or “portals”, act as regulated intermediaries between businesses conducting crowdfunding campaigns and investors. Businesses select a portal through which they would like to offer securities, and the offering is then listed on the portal’s website. Funding portals must be registered with the Securities and Exchange Commission (SEC) and become a funding portal member of the Financial Industry Regulatory Authority (FINRA).
Oversight and Regulation
The JOBS Act was passed in 2012 and sought to legalize and regulate the sale of securities without conducting a public offering, which requires an enormous regulatory burden and other barriers to entry that smaller companies cannot meet. Businesses must use a single portal for their crowdfunding campaign. Because there is less oversight with crowdfunding campaigns compared to public offerings, restrictions are set on issuers and investors. These restrictions are discussed in our previous Regulation Crowdfunding blog. Portals are responsible for ensuring that certain issuer restrictions are met, such as confirming that the amount of securities does not exceed investment limits.
Three pieces of legislation and rules define the regulations that crowdfunding portals must comply with: Title III of the JOBS Act, the SEC’s Regulation Crowdfunding, and FINRA’s member rules for funding portals. These rulings describe the registration process, disclosure requirements, campaign process, and any other regulatory requirements funding portals must comply with.
- Title III of the JOBS Act legalized and laid out the original framework for equity crowdfunding. Prior to being signed into law in 2012, the issuance of securities through crowdfunding was not permitted.
- Regulation Crowdfunding went into effect in 2016 and defined restrictions on investors and issuers, the information companies and portals would disclose with the SEC, and which companies were eligible to conduct offerings. A Form CFPORTAL must be filed with the SEC to register.
- FINRA’s rules for funding portals outlined the process of becoming a funding portal, as well as any additional disclosure requirements, like annual gross income assessments and ownership change disclosures. The FINRA registration process includes reserving a name for the portal, completing the FINRA entitlement Form, paying application fees, and submitting fingerprints for relevant partners, directors, and officers.
Different Portals, Different Focuses
While all funding portals must comply with the same regulations, they can choose to operate in different fields. Portals may specialize in real estate, entertainment, restaurants, or any other field of business. Crowdfunding campaigns tend to involve small businesses and startups, and platforms can choose to only conduct campaigns for relatively established companies or for companies that have not yet begun operations. Just as businesses can choose which portal they want to conduct their campaign on, portals can choose whether to accept or deny a business's request to conduct a campaign on their website. A full list of FINRA member funding portals can be found here. Fees and compensation structures vary across platforms.
Regulatory compliance doesn’t have to be painful. Our SEC filing software makes completing and submitting forms easy, and our team of experts can help guide you along the way. Whether you are looking to raise money for your company or interested in becoming a registered funding portal, contact us to see how we can help.