Highlights from webinar By Scott Andersen and

Brent Brague May 8th 2015

Brent Brague
VP of Sales

Voice: 1- 888-645-7018

Equity & Debt Crowdfunding:

Where We Are Now and Where We Are
Going Next

Scott Anderson

Scott is principal at finLawyer.com, General Counsel of

FundAmerica and principal at ConsultDA. He was most
recently the Deputy Regional Chief Counsel at FINRA,
and prior to that was the Enforcement Director at FINRA
and the NYSE, Co-Chief of the Securities Prosecutions
Unit of the NY Attorney Generals office, and Asst.
Attorney General for the State of NY. He concentrates his
practice on securities and regulatory law.
www.fundamerica.com
1

I receive inquiries at my law practice daily from people seeking to form equity & debt
crowdfunding platforms. Since the JOBS Act was signed into law in April 2012, there has been
a tremendous amount of excitement with crowdfunding. Interestingly, real estate funding
platforms are leading the charge, even more so than platforms focused on technology, medical
and other business sectors.
There have been a number of surprises since passage of the JOBS Act. At the Federal level,
crowdfunding still remains illegal. As such FINRA, the designated regulator of crowdfunding
portals, currently plays virtually no role. What we see instead is the formation of funding
platforms, not funding portals (more on this below). But even with no federal crowdfunding,
non-accredited will shortly be able to invest by way of Reg A+.
Capital formation for small companies is being, and has already been, altered dramatically.
Title II permits general solicitation under Rule 506(c) so long as investors are accredited. Title
III Crowdfunding rules for sales to non-accredited investors have never been finalized and are
considered by many to be unworkable. Title IV, which becomes effective on June 19, 2015,
permits investments by both accredited and non-accredited investors, albeit with some rather
expensive strings attached for small businesses.
So, if federal crowdfunding is not illegal, the thing exciting people that we are really talking is
not crowdfunding per se, but the use for the first time of funding platforms (websites) with
general solicitation and advertising to attract investors under Title II and soon Title IV. It is
interesting to note how this has developed, and how companies are raising funds today. And,
there is no question that funds are indeed being raise successfully today. Billions of dollars
worth.

The information and materials in this article are provided for general
informational purposes only and are not intended to be legal advice. The issues
discussed include complicated areas of law and legal advice should be obtained
from a securities attorney about your specific circumstances.

Funding Portals vs. Funding Platforms

The JOBS Act references funding portals at least thirty times. In October 2013, FINRA
issued Regulatory Notice 13-34 which set forth the parameters for funding portals.
Funding portals were to be regulated like miniature broker-dealers. They were to be
subject to FINRA membership, supervision, AML, and reporting rules. They were to be
subject to FINRA investigations, discipline and sanctions. But without the SEC
approving crowdfunding federally, there are no funding portals; they cannot legally
exist.
Rather, what we are seeing today are funding platforms. In contrast to funding portals
being mentioned over thirty times in the JOB Act, funding platforms are mentioned
only once. The term funding platform appears just a single time in the Title II
exemption from broker-dealer registration. Funding platforms are websites where
investments are advertised through general solicitation and where, up to this point at
least, sales are made to accredited investors under Rule 506. And while the
exemption from federal broker-dealer registration in Title II has been somewhat limited
by SEC interpretation, the SEC gave back what it took away by providing no-action
relief to FundersClub and AngelList. In short, while the broker-dealer exemption was
narrowed, by allowing venture funds to operate funding platforms without registering
as broker-dealers the SEC paved the way forward. The message was clear: funding
platforms are not required to register as a broker-dealer so long as they do not
engage in activities that traditionally require broker-dealer registration. These
prohibited acts include: receiving transaction-based compensation (basically
commissions, although

The information and materials in this article are provided for general
informational purposes only and are not intended to be legal advice. The issues
discussed include complicated areas of law and legal advice should be obtained
from a securities attorney about your specific circumstances.

Funding Portals vs. Funding Platforms (continued)

receiving a carried interest is fine); handling customer funds or securities (use an escrow agent
instead); and negotiating or recommending securities transactions (or cold calling). Thus,
funding platforms today generally fall into three business models: 1) the broker-dealer model
(where commissions are earned and investments are recommended); 2) the investment
adviser model (2/20 fees); and 3) the listing service model (where offerings are simply listed for
investors, and either no fees are charged such as may be the case with direct issuer offerings,
or where the platform charges listing fees or fees for the use tools and services). This is a
pretty remarkable change for raising funds for debt or equity offerings. Offerings no longer
require broker- dealer syndicates and investments are attracting investors through general
solicitation, doing exactly what the JOBS Act was designed to do. The one caveat is that, as
the SEC made clear, funding platforms should not act like broker-dealers.
But the market was missing one of the central tenets and purposes of the JOBS Act:
investments by non- accredited investors. While non-accredited investors individually may
make only small investments, collectively they may create the biggest boost to the capital
markets because there are three hundred million of them. As a result, many states have
decided not to wait for the Feds, and intrastate crowdfunding for non- accredited investors is
already available in 15 states (most recently, in Arizona). This is ideal for intrastate investment,
but you cannot go over state lines; though, remarkably, several states are in conversations
about creating super-regional crowdfunding and we may see that soon if there is a prolonged
course of delay on Title III. Regardless, for true nationally available offerings in which everyone
can participate, Reg A+ appears to provide a broad solution, though it is more expensive in
terms of both time and money to prepare and file an offering.

The information and materials in this article are provided for general
informational purposes only and are not intended to be legal advice. The issues
discussed include complicated areas of law and legal advice should be obtained
from a securities attorney about your specific circumstances.

Blue Sky Offering Registration vs. the Licensing of Selling Agents

Another hurdle is this: Simply because an offering (the securities themselves) is exempt from
state registration does not alleviate the requirement that the seller of securities be registered,
or meet an exemption from registration, in each state where the investors reside. The difficulty
here is that all state laws are different, and there are even differences in the laws of the states
that adopted one of the three versions of the Uniform Securities Act. Getting this all straight
when dealing with several states, much less fifty, will cause someones head to spin. But a
solution is available: hire a broker-dealer to serve as your broker of record to meet those blue
sky law requirements.

The information and materials in this article are provided for general
informational purposes only and are not intended to be legal advice. The issues
discussed include complicated areas of law and legal advice should be obtained
from a securities attorney about your specific circumstances.

6 Steps to minimize the risks of the Funding Platform Business

On the regulatory front we hear a lot from the SEC and FINRA about risk based approaches to
regulation, and we understand that participants in the industry need to take steps to mitigate
these risks. The regulators and industry have an obligation to educate market participants to
do it right and be compliant too. From one securities attorneys perspective, here are some risk
areas that funding platforms need to concentrate on:
1) dont forget to register as required in the states where each of your investors reside, or hire
a broker-dealer that is registered to effect the securities transactions there;
2) If you are not registered as a broker-dealer, you should not be acting like one. Hire a good
securities attorney to guide you to ensure you are not crossing the line;
3) treat non-accredited investors fairly. Treating them unfairly will likely result in regulatory
action;
4) use an escrow agent. Issuers should not be receiving investment funds directly from
investors;
5) disclose all material facts in your offering as required by the Securities Act of 1933.
The entire securities regulatory structure is predicated on this basic requirement. And dont
think this obligation is limited to the offering documents. You are selling securities, not
automobiles. Make sure your advertising is fair and balanced, disclosing both the positive and
negative pertaining to the investment. And do not misrepresent or omit any material facts in
your advertisements or on your website; and
6) stay in compliance with the rules of the securities exemption under which you are
conducting your offering. When these guidelines are followed, the future looks bright.

The information and materials in this article are provided for general
informational purposes only and are not intended to be legal advice. The issues
discussed include complicated areas of law and legal advice should be obtained
from a securities attorney about your specific circumstances.