Regulation Crowdfunding, or Reg. CF, of the Securities Act of 1933, as amended, allows businesses to raise up to $5,000,000 on a rolling 12-month through an intermediary, which is either a platform operated by a Broker-Dealer registered with the U.S. Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, or a Funding Portal. While both types of intermediaries aim to help businesses raise capital via the crowd, they operate under different regulatory frameworks, each offering unique advantages and trade-offs. Understanding these differences will help issuers choose the right platform for their needs.
What Is a Funding Portal?
A Funding Portal is an online marketplace, or platform, that connects issuers raising funds under Regulation Crowdfunding (Reg CF) with retail investors. Registering and operating a Funding Portal costs less than becoming a registered broker-dealer, and these savings are often passed on to issuers in the form of reduced fees. This cost-effectiveness makes Funding Portals an attractive option for companies seeking to raise capital under Reg CF while keeping their costs of raising capital low.
However, regulatory restrictions limit Funding Portals in certain activities. Specifically, a Funding Portal intermediary cannot
- offer investment advice or recommendations;
- solicit purchases, sales, or offers to buy securities displayed on their platform;
- compensate their employees or agents for such solicitation or based on the sale of securities, or
- hold, manage, possess, or otherwise handle investor funds or securities.
As a result of the above limitations, the success of a crowdfunding campaign on a Funding Portal may depend on the platform’s popularity and its ability to attract potential investors, since this type of Reg. CF intermediary cannot solicit, or sell securities on behalf of any issuer (17 CFR 227.300(c)(2)).
What Is a Broker-Dealer Platform?
In contrast, a Broker-Dealer Platform is a platform, not specifically for Reg. CF offerings, which is operated by a registered broker-dealer who complies with more stringent regulatory requirements under the Exchange Act, including "know your customer" (KYC) and anti-money laundering (AML) rules. While the registration and compliance costs are higher than that of a Funding Portal, Broker-Dealer Platforms provide several key advantages:
- They can offer investment advice and recommendations to investors.
- They are allowed to solicit purchases, sales, or offers to buy securities.
- They can compensate employees or agents based on the sale of securities.
- They are permitted to hold and manage investor funds or securities.
The Trade-Offs
While Broker-Dealer Platforms offer a wider array of services and more hands-on support, these advantages come at a cost. Issuers using these platforms generally face higher fees due to the increased regulatory burden. Additionally, Broker-Dealer Platforms tend to be more selective about the offerings they list, choosing those issuers that already align with their chosen focus industry or industries and the pool of potential investors is often smaller because of KYC and AML requirements. However, by using a Broker-Dealer Platform, you could develop a good working relationship with that broker-dealer. That relationship could lead to further equity financing ventures.
However, investors on these platforms are usually higher-net-worth individuals, many of whom may already have an interest in the issuer’s industry due to their membership with the Broker-Dealer Platform. This can be a significant advantage, as these investors are more likely to contribute meaningfully to a crowdfunding campaign. With a Funding Portal, issuers will need to rely mainly on non-accredited investors commonly referred to as retail investors, since that group of investors makes the bulk of investing via Funding Portals.
Which Platform Is Right for You?
Choosing between a Funding Portal and a Broker-Dealer Platform depends on your crowdfunding goals, budget, and target investor base. If you seek a lower-cost, wide-reaching option and don't need personalized investment advice, a Funding Portal may suit your needs. However, if you're willing to invest in a platform that offers more hands-on guidance and access to a more exclusive pool of investors, a Broker-Dealer Platform might be a better fit.
* * *
If you are interested in learning more about Regulation Crowdfunding intermediaries, or are interested in learning about the capital financing options that are available to you, please contact Patrick G. Costello at Patrick@bevilacquapllc.com, or (202) 869-0888 (ext. 130). You can also reach us at our general information email at info@bevilacquapllc.com.
About Patrick Costello
Patrick Costello is a Senior Associate at Bevilacqua PLLC, where he advises companies on federal securities law, corporate governance, capital raising, and complex transactions. His practice includes private placements, equity crowdfunding campaigns, Regulation A offerings, registered public offerings, and related disclosure and compliance matters.
Before joining the firm, Patrick served as an Examiner in the Division of Corporation Finance at the U.S. Securities and Exchange Commission. He uses that regulatory background to help clients navigate securities offering requirements, public company disclosure obligations, and practical business planning issues.
Patrick earned his J.D. from Wayne State University Law School and holds an LL.M. in International Business and Economic Law and a Securities and Financial Law Certificate from Georgetown University Law Center.
View Full Professional Bio | Connect on LinkedIn
This post contains general information. This post is not intended: (a) to convey or constitute legal advice on any subject matter; (b) to establish an attorney-client relationship; or (c) to be a solicitation. Also keep in mind that prior results in a legal matter do not guarantee a similar outcome in another legal matter.
Share this article
