A common question asked is whether a person’s crowdfunding portal or platform is legal, which is representative of a common mis-belief that websites are equal to businesses.
A website is just a website. A crowdfunding portal (or platform) falls under that umbrella term – it’s just a website, not a business. But, rest assured, there is a way to be or become legal.
So what, exactly, is a platform?
Again, there’s likely some confusion at play here. Many people confuse the 506b/c or Reg A “platform” with the Title III “portal” as defined in the JOBS Act.
A platform is a tool for general solicitation. You, as a person, can’t be a platform. What you can be is an issuer, or investment adviser, or listing service, or even a broker-dealer.
Regardless of which hat you’re wearing, you might use a variety of platforms – or tools –to provide information, including:
Platforms can be broken down into four types (pursuant to 506-D – Title II of the JOBS Act – and Regulation A – Title IV):
This, of course, begs the question, which platform are you? The answer is rooted in your business model.
Are you a broker-dealer?
Broker-dealers can charge commissions based on an offering while also offer specific recommendations (different from general solicitation). The broker-dealer’s typical charge (around 8%+) covers all costs associate with compliance, due diligence, and sales commissions.
As a broker-dealer, if you wanted to charge an 8% commission on a $2M offering, you’ll need to be either a FINRA member firm or a registered representative of one.
Keep in mind that only broker-dealers and registered representatives can receive commissions or success-
based compensation. This is a practice we see faulted upon often. Commissions can not be handed over – at any time – to an unregistered person or company. This means that unless you intend on registering every worker within your company, or you plan to buy all or part of a broker-deal, you cannot receive income tied to the amount or success of a securities offering.
Are you an investment adviser?
Investment advisers more often than not operate using a 2/20 model. This refers to a 2% annual management fee, and an upside profit-share of 20% in the profits of the business/investment (referred to as carried interest).
Under this model, you don’t have to be a broker-dealer, and, in fact, it’s likely best if you’re not. Starting an IA is typically free, as you’ll likely be exempt from federal and state registration requirements. If and when you do hit the threshold for state or SEC registration, you’ll find the costs to be extremely minimal, particularly when compared to the costs of operating a broker-dealer.
Are you an ad/listing service?
How this works is that an ad/listing service will charge a non-refundable listing fee (or a fixed transaction fee) which isn’t contingent upon the success of any associated deals.
For example, an issuer will come to the crowdfunding platform and pay the ad or listing fees for displaying their offering. The platform, in turn, focuses on marketing itself and offering general solicitation services to issuers. No commissions, fund management fees or carried interests are accepted during this process. As a result, you don’t have to be (nor should be) a broker-dealer with this model.
Are you an issuer-direct website?
These websites (or platforms) are run by businesses to solicit investors for their own deals. As a result, they don’t charge any fees.
These websites are just platforms that list and advertise offerings to potential investors (specific to 506-D and Reg A offerings). These sites aren’t subjected to specific oversights or regulatory memberships, although the securities still must comply with the ’33 Act and the sale of those securities must comply with each of the 50 mimi-SEC’s state laws.
With this model you don’t have to be a broker-dealer (nor should you be).
Should I just be a broker-dealer?
This isn’t recommended because unless you already are a broker-dealer, you likely have a level of expertise elsewhere. When you become a broker-dealer, you’re now burdened by regulatory compliance, which can wreak havoc on your business and the offerings you promote.
In other words, we suggest you to stick with what you know.
So is my business model legal?
Here’s a good rundown of how to help ensure the legality of your business model:
If you’re operating as an investment advisor, listing service, or issuer direct, do not charge fees based on successes of the offerings. Also do not make specific investor recommendations (general solicitation is still okay).
We recommend that you work with a broker-dealer to help you with specific federal and state compliance tasks you run into.
If you are operating as a broker-dealer, do not pay anyone or any business a portion of the compensation received unless they are registered.
Lastly, we always suggest that you work closely with your securities attorney before taking any action.