Funding Portals and Crowdfunding Offerings

NEW FOR 2022

Regulatory Obligations and Related Considerations

Regulatory Obligations:

Title III of the Jumpstart Our Business Startups (JOBS) Act enacted in 2012 contains provisions relating to securities offered or sold through crowdfunding. The SEC’s Regulation Crowdfunding and FINRA's corresponding set of Funding Portal Rules set forth the principal requirements that apply to funding portal members.

Funding portals must register with the SEC and become a member of FINRA. Broker-dealers contemplating engaging in the sale of securities in reliance on the crowdfunding exemptions must notify FINRA in accordance with FINRA Rule 4518 (Notification to FINRA in Connection with the JOBS Act).

Related Considerations:

• What steps is your firm taking to confirm all required issuer information, pursuant to Regulation Crowdfunding Rules 201 and 203(a), is publicly available on your firm’s platform?
• Does your firm plan to undergo or has it already undergone an operational or structural change that impacts the capitalization of the firm, pursuant to Funding Portal Rule 110(a)(4)? Has your firm reviewed the membership rules to confirm a Continuing Membership Application (CMA) is not required?

Exam Findings and Effective Practices

Exam Findings:

• Failure to Obtain Attestation – Not obtaining the attestation required by Regulation Crowdfunding Rule 404 when using a third-party vendor to store the required records.
• Missing Disclosures – Offerings on the platform do not contain all required disclosures as codified in Regulation Crowdfunding, in particular:
  • names of officers and directors of the issuer, and the positions held by these individuals for the past three years;
  • descriptions of the purpose and intended use of proceeds, the process to complete the offering transaction or cancel an investment commitment, the ownership and capital structure, the material terms of any indebtedness of the issuer; and
  • financial statements, as required by Regulation Crowdfunding Rule 201(t).

• Failure to Report Customer Complaints – Not reporting written customer complaints, as required by FINRA Funding Portal Rule 300(c).
• Untimely Required Filings – Not making required filings in a timely manner—such as filing the funding portal’s Statement of Gross Revenue by the deadline of March 1—and not filing updates or changes to contact information within 30 days of the change.
• Not Filing CMAs – Funding portals effecting changes in ownership without obtaining prior approval from FINRA, as required by Funding Portal Rule 110(a)(4).

Effective Practices:

• Compliance Resources – Developing annual compliance questionnaires to verify the accuracy of associated persons’ disclosures, including follow-up questions (such as whether they have ever filed for bankruptcy, have any pending lawsuits, are subject to an unsatisfied judgments or liens or received any written customer complaints), as well as compliance checklists and schedules to confirm that required obligations are being met in a timely manner, such as providing all issuer disclosure requirements of Regulation Crowdfunding Rule 201.
• Supervision – Implementing supervisory review procedures tailored to funding portal communications requirements that, for example, clearly define permissible and prohibited communications and identify whether any contemplated structural or organizational changes necessitate the filing of a CMA.

Additional Resource

• FINRA’s Funding Portals Topic Page