The passage of the JOBS Act not only created a new method of funding startups – equity crowdfunding – but also created a new type of website with unique responsibilities. These sites are called funding portals, and they are regulated by the SEC. Look for a proliferation of these portals over the next year. While the SEC has the rest of 2012 to specify exact rules, the overall responsibilities of funding portals are clear. For those of you just finding out about equity crowdfunding, you can visit look up crowd funding news for detailed background information.
For starters, it is assumed that funding portals must observe SEC Rule 10b-5, which prohibits fraudulent acts and omissions with regard to the sale of any security. Funding portals must ensure that a client company’s annual equity crowdfunding amounts do not exceed the statutory limits ($1M, or $2M if audited financials are provided). Portals cannot directly solicit offers to purchase crowdfunded securities nor offer investment advice or recommendations – this must be handled by a third party entity. Also, portals cannot hold any of the money raised through crowdfunding.
Here’s what funding portals can or must do:
- Register with the SEC and probably with FINRA.
- Publish disclosures regarding risks and any other matters required by the SEC.
- Oversee individual investors:
- review investor education information
- affirm that investor understands the risk of total loss
- determine that an investor understands the riskiness of investing in startups, including liquidity risk
- Provide fraud-prevention information:
- make available a background check on each officer, director and each investor holding over 20 percent of the outstanding equity
- make available a securities enforcement regulatory history check
- Make available, at least 21 days before a stock offering, any information that the issuer is obliged to disclose to the SEC.
- Ensure that the issuer doesn’t receive any crowdfunds until the aggregate capital raised from all investors hits the targeted offering amount.
- Ensure than no investor exceeds the annual crowdfunding investing cap applicable to his or her income and net worth.
- Protect investor privacy.
- Not pay for investor leads.
- Prevent any officers, partners of directors of the portal from having any financial interest in an issuer using the portal.
The effectiveness of these regulations in preventing fraud remains to be seen. It is a safe bet, however, that you will see dozens, if not hundreds, of funding portal websites pop up on the Internet in the next 12 months.