IT’S EASY TO BE A TITLE III CROWDFUNDING PORTAL!

All you have to do is:

  • Register with the Securities and Exchange Commission by filing a Form Funding Portal and posting a bond of at least $100,000.
  • Notify the SEC within 30 days if any of the information on Form Funding Portal changes.
  • Join FINRA and comply with all its rules and regulations.
  • Implement written policies and procedures “reasonably designed to achieve compliance with the federal securities laws.”
  • Comply with the requirements of 31 CFR Chapter X relating to money laundering.
  • Comply with the requirements of 17 CFR 248 relating to privacy.
  • Permit inspection by all your records and facilities by the SEC.
  • For each issuer (company trying to raise money) listed on your platform, have a reasonable basis for believing the issuer (1) complies with all applicable requirements, and (2)  has established a way to keep accurate records of investors.
  • Deny access to any issuer if:
    • You believe the issuer is a “bad actor.” To enforce this requirement you must (at a minimum) conduct a background and securities enforcement check on each issuer and on each officer, director, and beneficial owner of at least 20% of the issuer.
    • You believe the issuer or the offering presents the potential for fraud “or otherwise raises concerns regarding investor protection.” How would you know? If you are unable to “effectively assess the risk of fraud,” you have to deny access.
  • Provide educational materials to potential investors that explain in plain language “and are otherwise designed to communicate effectively and accurately”:
    • The mechanism for purchasing stock of the issuer;
    • The risks of purchasing stock;
    • The types of securities offered on your platform and the risks of each type;
    • The restrictions on resale imposed by law or contract;
    • The kinds of information the issuer is required to provide;
    • The per-investor limitations on investment;
    • The investor’s right to cancel the investment, and the limitations on those rights;
    • The need for the investor to think about whether the investment is appropriate; and
    • That following the investor’s purchase of stock, there might be no further relationship between the investor and your portal.
  • Keep all those educational materials current on your website and, where appropriate, make any revisions available to investors before accepting investments.
  • Tell investors about the requirements applicable to promoters.
  • Disclose to investors how you are being compensated.
  • Make available to investors and the SEC – in
    downloadable form – all the information the issuer itself is required to make available, including:

    • The name, address, and website of the issuer;
    • The names of the directors and officers, their positions with the issuer, and their overall business experience over the last three years;
    • Each person’s principal occupation and employment, and the name and principal business of any other entity where the occupation and employment took place;
    • The name of each person who owns at least 20% of the issuer;
    • A description of the issuer’s business and business plan;
    • The number of the issuer’s employees;
    • A discussion of factors that make the investment risky;
    • The target offering amount, and a statement that if the target is not reached, all the money will be returned;
    • Whether the issuer will accept money in excess of the target, and how;
    • The purpose and intended uses of the offering proceeds;
    • A description of the process to complete a purchase and sale of stock, including statements that:
      • An investor may cancel his investment up to 48 hours before the deadline;
      • The portal (you) will notify investors when the target amount is reached;
      • The issuer may close the offering before the deadline if the target amount is reached; and
      • If the investor does not cancel his investment and the target is reached, the offering will close
    • That a material change is made after an investor commits, his or her money will be returned unless he or she affirmatively re-commits;
    • The price of the stock;
    • A description of the capital structure of the issuer, including:
      • A summary of all securities, including associated voting rights;
      • A statement how the exercise of rights held by the principal stockholders of the issuer could affect investors;
      • The name and “ownership level” of each person who owns 20% or more of the issuer;
      • How the stock purchased by the investor was valued, and might be valued in the future;
      • The risks associated with minority ownership and the issuance of additional securities in the future; and
      • A description of all restrictions on transfer;
    • The name of the portal (you);
    • The amount of your compensation;
    • A description of all indebtedness of the issuer;
    • A description of all non-public offerings of securities within the last three years, including:
      • The date of the offering;
      • The offering exemption;
      • The types of securities offered; and
      • The amount of money raised and how it was used;
    • A description of any transaction since the beginning of the issuer’s last full fiscal year, involving at least 5% of the amount to be raised in the Title III offering, in which any of the following had an interest:
      • A director or officer of the issuer;
      • A person who owned 20% or more of the issuer;
      • A promoter of the issuer; or
      • A family member of any of the foregoing;
    • A description of the issuer’s financial condition;
    • Financial statements (the kind of statement is based on how much money the issuer is raising);
    • Any matters that would have resulted in disqualification under the “bad actor” rules had they occurred after Title III became effective.
  • Make all of that information available to investors and the SEC on a Form C (newly created) at least 21 days before any securities are sold, update the progress of the offering, and keep all of the information available until the offering is completed or canceled.
  • Before accepting money from an investor:
    • Have a reasonable basis for believing the investor satisfies the applicable investment limitations (you can generally rely on the investor’s representations); and
    • Obtain from the investor:
      • A representation that the investor has reviewed the education materials and can bear the entire loss of his or her investment; and
      • A questionnaire demonstrating the investor’s understanding that:
        • There are restrictions on his or her ability to cancel the investment;
        • It may be difficult to re-sell the stock; and
        • Investing is risky – in fact, the investor should be able to afford the loss of his or her entire investment.
  • Establish communications channels (message boards?) that allow investors to communicate with one another and with representatives of the issuers about offerings on your platform, provided that:
      • You can’t participate in these communications;
      • You have to provide unlimited public access to the communications, but can allow comments only from those registered with your platform; and
      • You require anyone posting comments to disclose whether he or she is affiliated with the issuer;
  • Upon receiving a commitment from an investor, you must give him or her notification of:
    • The dollar amount of the commitment;
    • The price of the security;
    • The identify of the issuer; and
    • The deadline for canceling the commitment;
  • Establish a relationship with a bank as an escrow agent under a written escrow agreement and direct that:
    • Funds from investors be transferred to the issuer if the target amount has been reached, the cancellation period has expired, and at least 21 days have elapsed since the issuer’s information was first made available on your platform; and
    • Return the funds to the investor if the investor cancels or the offering terminates.
  • On or before the closing of the offering, give notice to all investors, providing:
    • The date of the closing;
    • The type of security purchased by the investor;
    • The identity, price, and number of securities purchased by the investor;
    • The total amount of securities sold by the issuer and the price(s) at which they were sold;
    • If the security is a debt security, the interest rate, the maturity date, and the yield to maturity;
    • If the security is callable, the first date it can be called; and
    • The amount and source of your remuneration.
    • If the issuer decides to close the transaction earlier than the deadline established initially, give notice to all investors, providing:
      • The date of the new deadline;
      • The right for investors to cancel up to 48 hours before the new deadline; and
      • Whether the issuer will continue to accept commitments during the 48 hour period before the new deadline.
  • If there is a material change to the terms of the offering or the information about the issuer, notify investors that all commitments will be canceled unless investors re-confirm their commitments.
  • If any investor fails to re-confirm within five business days, notify the investor and direct the return of his or her money.
  • If an offering is canceled, notify all investors, direct the return of their money, and ensure that no further commitments are made for the offering.
  • Maintain the following records for five years:
    • Records relating to each investor who purchased securities or tried to;
    • Records relating to each issuer that offered securities or tried to;
    • Records of all communications on your platform;
    • Records relating to anyone who uses your platform to promote securities or communicate with investors;
    • Records that document your compliance with the SEC’s rules and regulations;
    • All your notices to issuers and investors, including your Terms of Use;
    • All your contracts;
    • Daily, monthly, and quarterly summaries of transactions, including:
      • Transactions that have successfully closed; and
      • Transaction volume, expressed in:
        • Number of transactions;
        • Number of securities sold in transactions;
        • Total amounts raised by each issuer; and
        • Total amounts raised by all issuers; and
    • A log reflecting the progress of each issuer.
    • Maintain and preserve all your organizational documents.

But you must not:

  • Have any financial interest in any of your listed companies.
  • Receive any financial interest as compensation for your services.
  • Offer investment advice or recommendations.
  • Deny access to an issuer based on your assessment of the issuer’s prospects.
  • Solicit purchases, sales or offers to buy the securities offered on your platform.
  • Compensate employees or others for such solicitation.
  • Hold or manage investor funds.
  • Pay anyone for providing personally identifiable information of investors.
  • Pay anyone except registered brokers or dealers for directing issuers or investors to your platform on a commission basis.

That’s all you have to do!

Questions? Contact Mark Roderick at Flaster/Greenberg PC.

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