BizTech Law Blog

The SEC Crowdfunding Proposed Regulations: Intermediary Registration Requirements

We continue our series on the proposed crowdfunding regulations issued by the SEC on Oct. 23, 2013 by turning our attention to the portion of the proposed regulations that relate to intermediaries of crowdfunding transactions.

An "intermediary" is the facilitator of a crowdfunding transaction through which issuers offer to sell securities and investors sign up to purchase securities. A registered broker may act as a crowdfunding intermediary. The activities involved in acting as an intermediary are already within the scope of the licensed activities of a registered broker.

Because of the nature of the activities engaged in by a funding portal, a funding portal, by its very nature, meets the legal definition of a broker. Rather than require a funding portal not otherwise associated with a broker to become licensed as a full-fledged broker, the SEC is proposing to authorize a separate streamlined registration process for funding portals that are not run by a registered broker.

An applicant for registration as a funding portal would have to complete a Form Funding Portal, a new form developed by the SEC for this purpose. Click here for a copy of this proposed new form. Registration would become effective on the later of 30 days after the completed Form Funding Portal is filed with the SEC, or the date the funding portal is approved for membership in FINRA.

This gets us to a second key requirement. Just like brokers are already required to be members of FINRA, so too are funding portals required to be members of FINRA. On Jan. 13, 2013, in anticipation of the SEC adopting crowdfunding regulations, FINRA released a Voluntary Interim Form for crowdfunding portals. Click here for a copy of this FINRA form. Once the SEC's crowdfunding regulations are finalized, this form is likely to change.

A funding portal is required to file the Form Funding Portal not only with the SEC, but also with FINRA. The filing will be available for public viewing through the SEC's website, with redactions of personally identifiable information or other information with a significant potential for misuse. The SEC has explicitly identified the following information for redaction: contact employee's direct phone number and email address; IRS Employer Identification Number; social security number; and date of birth.

The SEC has not proposed any specific requirements to be imposed on persons associated with a funding portal. The SEC did note in its comments, however, that FINRA may propose to impose requirements on an associated person, or to impose requirements relating to supervision of associated persons and compliance.

The SEC's proposal envisions that a registered funding portal would be able to operate multiple website addresses under a single registration.

As a condition of registration, a funding portal is generally required to have a fidelity bond that:

• Has minimum coverage of $100,000
• Covers associated persons
• Meets any other requirements imposed by FINRA.

The reason for the fidelity bond requirement is that funding portals would not be members of the Securities Investor Protection Corporation, and the SEC feels that some level of investor protection is needed in case a funding portal goes out of business. The good news is that the SEC is not proposing to require a funding portal to maintain a specified level of minimum net capital.

Nonresident (foreign) funding portals are subject to special rules, which we will not address in this article.

Please contact Iris Linder (517.371.8127 or ilinder@fosterswift.com) for more information.

Categories: Crowdfunding, Venture Capital/Funding