Securities Lawyer 101 l Brenda Hamilton

Securities Lawyer 101 l Brenda Hamilton

Friday, January 17, 2014

Regulation Crowdfund Intermediaries

Regulation Crowdfund provides for two types of intermediaries, the registered broker-
dealer and the funding portal. Broker-dealers do not need to register in order to engage
in crowdfunding offerings, but their activities in this area are governed by Regulation
Crowdfunding. Funding portals must register with the Securities and Exchange
Commission and the Financial Industry Regulatory Authority.

Issuer Interests By Intermediaries
Regulation Crowdfunding as proposed prohibits any intermediary from holding a direct or indirect
ownership of the issuer in the crowdfunded offering. The prohibition would include any 
interest in the issuer that is purely economic or financial in nature.

As such, the intermediary is prohibited from receiving an ownership interest of the issuer including shares as compensation.

Transaction Based Compensation
Regulation Crowdfund will allow broker-dealers as well as funding portals to receive transaction based compensation.

While funding portals are brokers under the Securities Exchange Act, they are not required to register as such because they can register as funding portals.

Obligations of Intermediaries
Whether the intermediary is a broker-dealer or a funding portal, its obligations in a crowdfunded offering are to:
♦ Provide the issuer with an internet platform to facilitate the offering, that includes required disclosures, and a
communication channel pursuant to which potential investors and others may discuss the offering;
♦ Take measures to reduce the risk to investors and reduce fraud, including conducting appropriate due
diligence about the issuer and its offering and denying access to issuers who are disqualified or present a
potential for fraud;
♦ Open accounts for each investor;
♦ Provide investors with educational materials, confirmations of investment commitments
and purchases, and notifications of various events such as cancellation of the offering; and
♦ Arrange for the delivery of funds by investors to an escrow agent or trustee.

Liability of Intermediaries
Proposed Rule 502 provides a safe harbor to issuers in the event of failures by the
intermediary, so long as the issuer was not aware of such non-compliance or the failure
occurred with respect to the offering of another issuer.

Rule 301 of Regulation Crowdfund requires that funding portals have a reasonable basis
for believing that an issuer seeking to offer and sell securities in reliance on the
crowdfunding exemption through the funding portal’s platform complies with the
requirements of the exemption.  The rule also requires funding portals deny
access to its platforms to issuers when the platform believes that the issuer or the
offering presents the potential for fraud or otherwise raises concerns regarding
investor protection. Additionally, should a funding portal becomes aware of information
that causes it to believe that the issuer or the offering presents the potential for fraud
or otherwise raises concerns regarding investor protection, the funding portal must
remove the offering from its platform.

The SEC has proposed a safe harbor for issuers for, among other things, insignificant
failures to comply with Regulation Crowdfund and good faith attempts to comply that
fall short. While the safe harbor protects the offering (i.e., the issuer would not be
required to become a public company), it does not protect the intermediary.  As such,
Intermediaries should exercise extreme caution to ensure compliance with Regulation

This securities law blog post is provided as a general informational service to clients and
friends of Hamilton & Associates Law Group and should not be construed as, and does
not constitute, legal and compliance advice on any specific matter, nor does this
message create an attorney-client relationship. For more information concerning the
rules and regulations affecting SEC registration statements, Rule 144, Form 8K, FINRA Rule
6490, Rule 506 private placement offerings, Regulation A, Rule 504 offerings, Rule 144,
SEC reporting requirements, 1933 Act registration statements on Form S-1, S-8 and
1934 Act registration statements on Form 10, OTC Pink Sheet listings, OTCBB and OTCMarkets
disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, go public direct
transactions and direct public offerings please contact Hamilton and Associates
at (561) 416-8956 or Please note that the prior results discussed
herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 N
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855

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