SEC: A Small Business Compliance Guide on Registration of Funding Portals.
On February 29, 2016, the Securities and Exchange Commission (“SEC”) issued “A Small Entity Compliance Guide: Registration of Funding Portals.” [1] The full text of the investor bulletin is available here. One of the requirements for crowdfunding under JOBS Act is that it be done through an intermediary; no issuer can do crowdfunding directly without using one. [2] For details of the final rules, including registration and disclosure requirements for intermediaries, please see our previous series “Is It Time To Do Crowdfunding To Raise Money?: SEC Releases Federal Crowdfunding Final Rules.” The compliance guide focuses only on the registration requirements.
The final rules require that each intermediary in a crowdfunding transaction be registered with the SEC either as a broker-dealer or a funding portal and be a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”), which is currently the only registered national securities association. Although federal crowdfunding did not become legal until May 16, 2016, funding portal registration with the SEC began on January 29, 2016. Broker-dealers register with the SEC on existing form BD using FINRA’s Central Registration Depository (CRD) system; funding portals register on new Form Funding Portal through the SEC’s Electronic Data Gathering, Analysis, and Retrieval (EDGAR) system. The compliance guide sets forth how to register as a funding portal in great detail, as follows:
- If you have never used EDGAR, create an account by submitting a Form ID application on the EDGAR Filer Management website. This is the same process you need to go through before filing any SEC form (for example, Form D notice);
- Once your Form ID application has been accepted and you have received your Central Index Key (CIK), generate access codes (PMAC, CCC, and password). You now have an EDGAR account, CIK number, and password to log into EDGAR;
- Once logged in, look for Form Funding Portal under the Regulation Crowdfunding tab. You will need to file one executed copy through the EDGAR system. There is no filing fee.
A funding portal’s registration becomes effective on the later of: (1) 30 calendar days after the date that the registration is received by the SEC; or (2) the date the funding portal is approved for membership in FINRA. A funding portal must also file an amendment within 30 days when the information submitted on the original form becomes inaccurate for any reason and file a withdrawal of registration as soon as it ceases to operate as a funding portal.
As a reminder, a funding portal cannot: (i) offer investment advice or recommendations; (ii) solicit purchases, sales, or offers to buy the securities displayed on its platform; (iii) compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its platform; or (iv) hold, manage, possess, or otherwise handle investor funds or securities. The compliance guide clarifies that anyone who engages in any of these activities must act as a broker-dealer, rather than as a funding portal.
This post was the third part of a multi-part series on crowdfunding under the JOBS Act. You can find the other posts by searching our blogs at www.mcbrideattorneys.com. In our next post, we will discuss FINRA’s funding portal rules.
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
R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC, which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064; [email protected], or www.mcbrideattorneys.com.
[1] SEC, A Small Entity Compliance Guide: Registration of Funding Portals (Feb. 29, 2016), https://www.sec.gov/divisions/marketreg/tmcompliance/fpregistrationguide.htm#_ftn1. Unless otherwise noted, all references to the investor bulletin are from this citation.
[2] See generally 15 U.S.C. § 77d(a)(6).