• Dec. 9, 2016, 3:45 am

The nitty gritty of Title III

Title III Crowdfunding is something completely new for the US securities business.

The SEC final rules have made Crowdfunding more attractive by allowing portals five ways to generate revenue. Portals can charge up front fees to issuers, charge commissions to issuers based on capital raised, take a financial interest in the issuer, accumulate and sell data and sell advertising space on the portal. The SEC has also relaxed the financial reporting required by issuers and clarified that the Title III offering will not interfere with other exempt offerings.

The Crowdfunding portal becomes the marketplace where investors can look among the various Title III offerings. Mark Roderick, an attorney specializing in Crowdfunding, summarized Crowdfunding portals the following way.

‘A Title III Crowdfunding portal is a highly-regulated, quasi-governmental entity, a sort of mini-SEC, responsible for policing issuers and their owners.’

If you are not already registers with the SEC as a broker, to become a portal you must complete and file Form Funding Portal with the SEC and register with the Financial Industry Regulatory Authority (FINRA).

Crowdfunding portals are allowed to pick and choose which offering to list on their platforms. The portal can highlight certain offerings on their website.

They can provide search functions for the investors, advise insurers about their offerings, prepare offering documentation and pay or receive compensation from broker-dealers in some cases.

The portal can also compensate a third party for referring business to the Crowdfunding platform. The platform can also advertise.

This is the first time in the 80-year history of the SEC that a company looking to raise money can advertise.

The Crowdfunding portal cannot offer investment advice or recommend certain offerings. Also the platforms may not ‘solicit purchases, sales, or offers of securities on the platform’. Accordingly, the portal may not compensate employees or agents for such solicitations.

Further requirements for the Crowdfunding platform are to maintain communication channels. A chat room that allows potential investors to talk to one another and to the issuer.

The portal cannot participate except to remove abusive or fraudulent content. The chat room must be transparent. Open to the public to view yet only registered users can post comments. Issuers must identify themselves as representing the investments and the portal must keep records of the chats. Everything in the portal is handled electronically including all documentation.

The Crowdfunding platform is responsible for making sure that both the issuers and the investors qualify for and satisfy the SEC Title III Crowdfunding rules and regulations.

The portal is further mandated with the education of the investor regarding the process of buying securities on the portal.  This includes the risk/return tradeoffs and the rules associated with divestitures. Essentially, is the investment appropriate for the investor?  For example a retired person looking for income has totally different investment needs than a young single professional looking to maximize long-term capital gains.

Unless the Crowdfunding platform is a register broker, all investor money or securities are held in an escrow account. All record keeping is administered by the portal. This includes the records of issuers and investors, all communications, all transactions and all documents, which must be kept for at least five years.

Visit Katipult to learn more about how you can launch your own Crowdfunding or Online Syndication Platform for Equity, Debt, Real Estate, and Alternative Investments. If you have a topic that could potentially change the crowdfunding landscape, we’d like to hear about it. Send us a tweet [email protected] or email us at [email protected].

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