With increasing frequency, we are asked whether an issuer that is considering a Regulation A offering is required to engage or use the services of a funding portal. In short, NO. A funding portal is a new type of financial intermediary that performs certain limited functions in connection with Title III crowdfunded offerings. A funding portal cannot: offer investment advice or recommendations; solicit purchases, sales, or offers to buy securities offered or displayed on its website or portal; compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal; hold, manage, possess, or otherwise handle investor funds or securities; or engage in other activities as the SEC may determine by rulemaking. If a funding portal limits itself to certain services then it would not (in the absence of other factors) be required to register with the SEC as a broker-dealer. However, a funding portal will be required to register with the SEC and with FINRA. The proposed FINRA rules applicable to funding portals attempt to "scale down" the framework applicable to broker-dealers for funding portals, recognizing that these entities will offer fewer services. As we have discussed in prior posts, the SEC has not adopted final crowdfunding rules. Chair White has noted in various public statements that it is her intention that the Commission adopt final rules before year end; however, these rules require coordination among the Division of Corporation Finance and the Division of Trading and Markets within the SEC and also require that FINRA adopt final rules related to the regulation of portals. So, in the meantime, funding portals do not exist—at least not SEC-registered, FINRA-registered funding portals. A funding portal or a registered broker-dealer must assist with a Title III crowdfunded offering. No such requirement exists for Regulation A offerings.
Matchmaking sites that rely on the guidance in Title II of the JOBS Act are limited to facilitating certain Rule 506 offerings and performing limited services to the extent that they would like to avoid being required to register as broker-dealers. As a result, a site that purports to facilitate Regulation A offerings is neither a funding portal nor a matchmaking site.
An issuer can conduct a Regulation A offering on its own, without a financial intermediary, and based on some recent SEC data it sounds like to date most Regulation A offerings have not involved an intermediary. To the extent that an issuer engages a financial intermediary to assist in structuring the transaction, identifying investors, and assisting in negotiating with investors, the issuer should consider whether the intermediary is a registered broker-dealer.
Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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