Crowdfunding Crowdfunding Intermediaries And Funding Portals

Fri, 10/11/13
By: Simon R. Inman, Partner

This is the third in a series of bulletins about the crowdfunding exemption from the requirements for SEC registration included in the JOBS Act of 2012. Previous bulletins were published in March 2013 and June 2013. The purpose of this bulletin is to explore in more detail the role of funding portals that will form an integral part of the crowdfunding process.

The legislation allows a crowdfunding intermediary to establish a funding portal through which investors will be able to make crowdfunding investments. The crowdfunding intermediary must be registered with the SEC and regulated by FINRA or another regulatory body.

The crowdfunding intermediary’s obligations will include:

  • Providing the disclosures about the business required by the SEC;
  • Ensuring investors review educational materials and understand the risks of investing, including the lack of any market in the securities and the risk of a total loss of the investment;
  • Protecting investor privacy;
  • Reviewing background checks on the directors, officers and significant stockholders of the companies;
  • Protecting the investor’s right to change his or her mind within the window allowed;
  • Only releasing funds once the target offering amount has been raised; and
  • Monitoring the limits on the amounts investors are allowed to invest. The maximum amount any investor can invest in any 12-month period is limited to (i) the greater of $2,000 or 5% of annual income or net worth (if either is less than $100,000), or (ii) 10% of annual income or net worth (if either is greater than $100,000), but not more than $100,000 in total. It is not clear how funding portals will be able to monitor compliance with these limits otherwise than through self-certification. However, funding portals through which investors regularly invest will at least be able to monitor the amount being invested through that funding portal by such investors.

Crowdfunding intermediaries operating funding portals may not:

  • Offer investment advice or recommendations;
  • Solicit offers, sales or offers to purchase securities offered through the portal;
  • Compensate employees, agents or others for soliciting investors or investments based on sales of securities offered through the portal;
  • Hold or handle investor funds (a separate escrow agent must be used); or
  • Allow its principals to invest in any securities offered through the portal.

Given these responsibilities and restrictions, it will be interesting to see how crowdfunding intermediaries operating funding portals will be compensated for the services they offer. All will be revealed when the SEC gets around to publishing its rules.

The final bulletin in this series will explain some of the practical implications for companies looking to take advantage of crowdfunding.

For more information contact Simon Inman at or at (707) 526-4200.

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