Texas Crowdfunding Portal Registration and Activities.
As we mentioned previously, an offering conducted under the crowdfunding exemption must be made exclusively through an Internet website operated by a registered general dealer or registered TCP.
Local Character. Just like crowdfunding issuers, a TCP must be an entity formed and authorized to do business in Texas.[1] A TCP should be physically located in and operate exclusively within Texas.[2] Moreover, a TCP must be engaged exclusively in intrastate offers and sales of securities in Texas and limit its activities to operating an Internet website utilized to offer and sell securities under the Texas crowdfunding exemption, without operating or facilitating a secondary market in securities.[3]
Registration. To apply as a TCP, the applicant must submit a registration form (Form 133.15), Uniform Application for Securities Industry Registration (Form U-4), a copy of its formation documents, and any other information necessary to determine the financial responsibility, business repute, or qualifications of the portal, along with the appropriate registration fee.[4]
Reporting. A TCP is subject to post-registration reporting requirements applicable to dealers with respect to certain disqualifying events.[5] Registration expires at the end of the calendar year, renewable upon written application and payment of the fees.[6]
Background Checks of Issuers. In addition to the requirements for the website, discussed previously, a TCP must conduct a reasonable investigation of the background and regulatory history of each issuer and its control persons before offering securities to Texas residents on the portal’s website.[7] The portal must deny an issuer access to its website if the portal has a reasonable basis for believing that the issuer, or any of its control persons, is subject to a disqualification, the issuer has engaged in or the offering involves any fraud or deceit, or the portal cannot adequately assess the risk of fraud by the issuer or its potential offering.[8] The TCP is given flexibility on conducting these checks and can conduct them itself or contract them out to a third-party provider, in which case the TCP should investigate and understand the procedures used by a third party to determine if it is reasonable to rely upon the results.[9] The TCP may want to review, for example, the issuer’s certificate of formation on file with the Texas Secretary of State, crowdfunding exemption notice (discussed above), credit reports, UCC filings, court judgments, and other offerings by the issuer or its affiliates to verify the amounts raised within the relevant time period.[10]
Recordkeeping. A TCP is subject to certain recordkeeping requirements, for a period of five years, including records of compensation received for acting as a portal, records relating to verification of Texas residency and accredited investor status, any agreements, correspondence, or other communications between the portal, issuers, prospective purchasers, and investors, any information made available through the portal’s website, and any other records relating to the offers and/or sales of securities made through the website, to name just a few.[11]
Prohibited Activities. A TCP is prohibited from the following activities:
- Offering investment advice or recommendations;
- Compensating employees, agents, or other persons not registered with the TSC for soliciting offers or sales of securities displayed or referenced on its platform or portal;
- Holding, managing, possessing, or otherwise handling investor funds or securities;
- Affiliating with an issuer whose securities appear on the website;
- Holding a financial interest in any issuer offering securities on the portal’s website; and
- Receiving a financial interest in an issuer as compensation for services provided.[12]
Permitted Activities. A TCP may engage in other non-securities business on its website, including donation- or rewards-based crowdfunding, but it should be careful not to commingle the records of its securities and non-securities business.[13]
This post was a part of a multi-part series on Texas crowdfunding exemption. You can find the other posts by searching our blogs at www.mcbrideattorneys.com. In our next post, we will discuss what a portal can or cannot do in greater detail.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
About the Author
Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C., which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. R. Shawn can be contacted at: 407-517-0064; [email protected], or www.mcbrideattorneys.com.
[1] 7 Tex. Admin. Code § 115.19(a).
[2] TSSB, Information for Texas Crowdfunding Portals, https://www.ssb.texas.gov/texas-securities-act-board-rules/texas-intrastate-crowdfunding/information-texas-crowdfunding (last visited Oct. 29, 2015).
[3] 7 Tex. Admin. Code § 115.19(a).
[4] Id. § 115.19(f). The fees are currently $275 for the TCP and $285 for each designated officer or agent to be registered in Texas.
[5] Id. See also id. § 115.9.
[6] Id. The renewal fees are currently $270 for the TCP and $275 for each designated officer or agent.
[7] Id. § 115.19(d).
[8] Id.
[9] TSSB, supra note 27.
[10] Id.
[11] 7 Tex. Admin. Code § 115.19(e).
[12] Id. § 115.19(c). Many of these prohibitions are designed to prevent conflicts of interests that would incentivize the TCP from promoting certain issuers over others. See 39 Tex. Reg. 8961, 8962 (Nov. 14, 2014).
[13] TSSB, supra note 27.