Funding Portal Requirements Under the New Crowdfunding Law
 
By John W.  Cones
 
            The new crowdfunding law passed by both houses of Congress and signed into law by the President (H.R. 3606 – the Crowdfund Act) sets out specific requirements for funding portals at Section 304(b). The term “funding portal” means any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others, solely pursuant to section 4(6) of the Securities Act of 1933, that does not:

(a) offer investment advice or recommendations;

(b) solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal;

(c) compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal;

(d) hold, manage, possess, or otherwise handle investor funds or securities; or

(e) engage in such other activities as the Commission, by rule, determines appropriate.
 
            Registration – Funding portals must register with the SEC and with any applicable self-regulatory organization as defined in Section 3(a)(26) of the Securities Exchange Act of 1934.
 
            Disclosures – Funding portals must also provide certain disclosures (i.e., written information given to each prospective investor before they invest), including disclosures related to risks and other investor education materials, as the SEC determines by rule, to be appropriate.
 
            Investor Education – These funding portals must also ensure the following with respect to each investor utilizing their facility:
 
(a) reviews investor-education information, in accordance with standards established by the SEC rule to be promulgated;
 
(b) positively affirms that the investor understands that the investor is risking the loss of the entire investment, and that the investor could bear such a loss; and
 
(c) answers questions demonstrating the following:
 
(i) an understanding of the level of risk generally applicable to investments in startups, emerging businesses, and small issuers;
 
(ii) an understanding of the risk of illiquidity; and

(iii) an understanding of such other matters as the Commission determines appropriate, by rule.
 
            Background Checks – The funding portals must also take such measures to reduce the risk of fraud with respect to such transactions, as established by the SEC, by rule, including obtaining a background and securities enforcement regulatory history check on each officer, director and person holding more than 20 percent of the outstanding equity of every issuer whose securities are offered by such person.
 
            Providing Issuer Information to SEC – Then, not later than 21 days prior to the first day on which securities are sold to any investor (or such other period as the SEC may establish), make available to the SEC and to potential investors any information provided by the issuer pursuant to section of this law relating to issuer disclosure (i.e., Subsection (b).
 
            Offering Proceeds – The funding portals must also ensure that all offering proceeds are only provided to the issuer when the aggregate capital raised from all investors is equal to or greater than a target offering amount, and allow all investors to cancel their commitments to invest, as the SEC, by rule, determines to be appropriate.
 
            Investment Limits – Further, the funding portals must make such efforts as the SEC determines appropriate, by rule, to ensure that no investor in a 12-month period has purchased securities offered pursuant to section 4(6) that, in the aggregate, from all issuers, exceed the investment limits set forth in section 4(6)(B) [see earlier article re the crowdfunding requirements for issuers) .
 
            Privacy of Investor Information – In addition, the funding portals must take such steps to protect the privacy of information collected from investors as the SEC determines, by rule, to be appropriate.
 
            Compensation – The funding portals may not compensate promoters, finders or lead generators for providing a broker or funding portal with the personal identifying information of any potential investor.
 
            Financial Interests in Issuers – The funding portal’s directors, officers or partners (or any person occupying a similar status or performing a similar function) is prohibited from having any financial interest in an issuer using its services.
 
            SEC Rules – The funding portal will have to meet such other requirements as the SEC may, by rule, prescribe, for the protection of investors and in the public interest.
Copyright 2011 by John W. Cones
ALL RIGHTS RESERVED
jwc6774@gmail.com