Do you want to launch a funding portal for investment crowdfunding? Currently, there are only 12 of these that have gone through the process required under the JOBS Act. Here is a very abbreviated summary of some of the main requirements for starting and operating an investment crowdfunding portal:
Funding Portal Registration
To create a funding portal you have to complete and file “Form Funding Portal” with the SEC.
You also have to become a member of FINRA (see details here: http://www.finra.org/industry/funding-portals).
Limitations on Funding Portals
The funding portal may not
(1) Offer investment advice or recommendations;
(2) Solicit purchases, sales or offers to buy the securities displayed on its platform;
(3) Compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its platform; or
(4) Hold, manage, possess, or otherwise handle investor funds or securities.
Measures to Reduce Risk of Fraud
Among other things, the funding portal must conduct a background and securities enforcement regulatory history check on each issuer and on each officer, director or beneficial owner of 20 percent or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power.
Educational Materials that Must Be Provided to the Investor
In connection with establishing an account for an investor, the portal must deliver educational materials to such investor that explain in plain language and are otherwise designed to communicate effectively and accurately:
(1) The process for the offer, purchase and issuance of securities and the risks associated with purchasing securities;
(2) The types of securities available for purchase on the intermediary’s platform and the risks associated with each type of security, including the risk of having limited voting power as a result of dilution;
(3) The restrictions on the resale of a security offered and sold in reliance on the crowdfunding exemption;
(4) The types of information that an issuer is required to provide under the rules, the frequency of the delivery of that information and the possibility that those obligations may terminate in the future;
(5) The limitations on the amounts an investor may invest under the rules;
(6) The limitations on an investor’s right to cancel an investment commitment and the circumstances in which an investment commitment may be cancelled by the issuer;
(7) The need for the investor to consider whether investing in a security offered and sold in reliance on the crowdfunding exemption is appropriate for that investor;
(8) That following completion of an offering conducted through the portal, there may or may not be any ongoing relationship between the issuer and the portal; and
(9) That under certain circumstances an issuer may cease to publish annual reports and, therefore, an investor may not continually have current financial information about the issuer.
Promoters and Compensation Disclosure
The portal must inform investors regarding any person who promotes an issuer’s offering for compensation.
When establishing an account for an investor, an intermediary must clearly disclose the manner in which the intermediary is compensated in connection with offerings and sales of securities.
Each time before accepting any investment commitment (including any additional investment commitment from the same person), an intermediary must obtain from the investor
(a) A representation that the investor has reviewed the intermediary’s educational materials, understands that the entire amount of his or her investment may be lost, and is in a financial condition to bear the loss of the investment; and
(b) A questionnaire completed by the investor demonstrating the investor’s understanding that:
(i) There are restrictions on the investor’s ability to cancel an investment commitment and obtain a return of his or her investment;
(ii) It may be difficult for the investor to resell the securities; and
(iii) Investing in securities offered and sold in reliance on the crowdfunding exemption involves risk, and the investor should not invest any funds unless he or she can afford to lose the entire amount of his or her investment.
The portal must provide communication channels by which persons can communicate with one another and with representatives of the issuer. The portal may not participate in these communications. Anyone may view the discussions but only investors that have opened accounts may post comments.
Maintenance and Transmission of Funds
The portal may not handle funds. It must direct investors to transmit the money directly to a qualified third party, such as a registered broker or dealer or a bank or credit union.
A funding portal must implement written policies and procedures reasonably designed to achieve compliance with the federal securities laws and the rules and regulations thereunder relating to its business as a funding portal.
A funding portal must also comply with federal rules related to privacy of consumer financial information and safeguarding personal information; limitations on affiliate marketing; identity theft red flags).
A funding portal must permit the examination and inspection of all of its business and business operations that relate to its activities as a funding portal, such as its premises, systems, platforms, and records by representatives of the Commission and of the registered national securities association of which it is a member.
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