How To Operate A Title II Portal And A Title III Portal On The Same Platform

By Mark Roderick , CrowdFund Beat   Sr. Guest  Contributor, @CrowdfundAttny.

Most Title II and Title IV portals will also want to operate Title III portals, and vice versa. Can they do it?

The Title III regulations issued by the SEC appear to contemplate that a Title III portal – a “funding portal” – will do more than operate a Title III portal. For example, 17 CFR §227.401 provides that “A funding portal. . . .is exempt from the broker registration requirements of section 15(a)(1) of the Exchange Actin connection with its activities as a funding portal.” If a Title III portal couldn’t do anything else, that extra language at the end wouldn’t be necessary.

The same is true for of the regulations issued by FINRA. FINRA prohibits Funding Portals from making false or exaggerated claims, implying that past performance will recur, claiming that FINRA itself has blessed an offering, or engaging in other misconduct, but a well-behaved Title II or Title IV portal would have no trouble meeting those standards.

What about the platform itself? The Title III regulations (17 CFR §227.300(c)(4)) define “platform” as:

A program or application accessible via the Internet or other similar electronic communication medium through which a registered broker or a registered funding portal acts as an intermediary in a transaction involving the offer or sale of securities in reliance on section 4(a)(6) of the Securities Act.

Nothing there would prohibit Title II, Title III, and title IV securities from appearing on the same website.

The fly in the ointment is 17 CFR §227.300(c)(2)(ii), which provides that a Title III portal may not:

Offer investment advice or recommendations; OR
Solicit purchases, sales or offers to buy the securities displayed on its platform.
What does that mean, in the context of a portal offering both Title II and Title III securities? What itshould mean is that a Title III portal cannot offer investment advice or recommendations concerning Title III securities, and cannot solicit purchases, sales, or offers of Title III securities. The idea of Title III is to protect Title III investors. Why should the SEC care whether the portal is offering investment advice concerning Title II or Title IV securities?

But we can’t be 100% sure that’s what it means. If it means that a Title III portal can’t offer investment advice about any securities and can’t solicit offers to buy any securities, then we need to steer clear.

I’ve spoken informally with the SEC and they’re not sure how to interpret 17 CFR §227.300(c)(2)(ii). They suggested I submit a request for a no-action ruling and I guess I will, unless one of my Crowdfunding colleagues already has.

Pending that guidance, there are several ways to operate a Title II portal, a Title III portal, and a Title IV portal on the same platform:

Operate the portals through a single legal entity. Avoid giving investment advice to anybody or soliciting purchases, sales, or offers of any securities.
Operate the portals through one legal entity. If you want to offer investment advice and/or actively solicit, do it through or more additional legal entities. For now, limit the investment advice and active solicitation to Title II and Title IV securities.
Create a separate legal entity to hold the Title III license. Create an arm’s length license agreement between that entity and the entity that owns the platform (a simple downloadable form is here). List all the deals on the same platform, but make sure that when an investor clicks on a Title III deal the Title III portal handles the investment process.
Finally, FINRA is a wonderful organization, but I’m not necessarily eager to have FINRA looking at everything my clients do. All other things being equal, I might choose option #3 just to keep a degree of separation between the regulated entity and my non-regulated activities. But that’s not necessarily the end of it – FINRA will want to explore the relationship between the funding portal and its affiliates.

This is a form of a legal document. It might not be appropriate for your situation. Before using it, you should speak with a lawyer. This form does not constitute legal advice and does not establish a lawyer/client relationship between you and Flaster Greenberg PC.

 

1c53d7e-1-120x120

Mark also maintains a widely-read Crowdfunding blog at crowdfundattny.com. In addition to Flaster/ Greenberg’s Crowdfunding Practice, Mark is also a member of the firm’s Mergers and Acquisitions, Business and Corporate, and Taxation Practice Groups. He represents entrepreneurs and their businesses across a wide range of industries, including technology, real estate and healthcare. Mark holds a Master’s degree in mathematics as well as a J.D. from the University of Virginia. You can reach Mark at 856.661.2265 or mark.roderick@ flastergreenberg.com.

For more information on Crowdfunding, including news, updates and links to important information pertaining to the JOBS Act and how Crowdfunding may affect your business, : @CrowdfundAttny.

Tags: , , , , , , , , , ,

HEADLINE NEWS

FortuneCrowdfunding: Women Better at Raising Money Than Men Are ...FortuneA new study has found that women are generally better than men at crowdfunding.Women are better at crowdfunding than men, shows study | The ...The IndependentWhy women join the crowd: Gender gap in bank lending, [...]

Banking Limitations Restrict Bisx Model For CrowdfundingBahamas Tribune#Banking system limitations are restricting the Bahamas International Securities Exchange's (BISX) development of crowdfunding and small business listing platforms, its chief executive has revealed. #Keith Dav [...]

Grand Forks HeraldWomen's WCHA launches crowdfunding campaign to improve leagueGrand Forks HeraldThat mindset led the WCHA to announce a crowdfunding campaign Thursday, July 20, to help fund the league's expenses and lessen the financial burden of the seven remaining schools [...]

Enterprise InnovationWomen are better when it comes to crowdfunding | IT-OnlineIT-OnlineWhile men are more likely to use seed crowdfunding than women, women are more successful in reaching their finance goal. This holds true in all sectors and...Women outperform men in seed crowdfundi [...]

Gamasutra (blog)Gamasutra: Anti Danilevski's Blog - The problems of crowdfunding ...Gamasutra (blog)The Art & Business of Making Games. Video game industry news, developer blogs, and features delivered daily.and more » [...]

CNBCAfrica.comCrowdfunding changing people's livesCNBCAfrica.comCNBC Africa's Tshepho Modiba is joined by Mosa Nyamande, Head of Operations and Technology at Khonology for a look at Crowdfunding, a method used to collect many small financial contributions by tapping into the [...]

How Women Trounce Men When Raising Seed Crowdfunding CapitalForbesMale entrepreneurs may account for the majority of business owners raising finance on crowdfunding platforms in the UK, but their female counterparts are far more likely to get the support they seek, new research shows. [...]

YourStory.comA crowdfunding portal ensuring total authenticity of cases, MeHelp lets you donate confidentlyYourStory.comIn March this year, Samiya Hafeez, a 22-year-old woman from Hyderabad, was arrested for running a fake crowdfunding campaign through which she collected almost Rs 22 [...]

The ACNC Crowdfunding Guidance Misses The Biggest Opportunity in Crowdfunding: TrustPro Bono AustraliaAs adoption of crowdfunding by the charity sector has been booming, it's promising to see the ACNC taking steps to inform charities about the potential to access new donors, in a [...]

KHOUSpace Center Houston crowdfunding to restore NASA's mission ...KHOUSpace Center Houston is now crowdfunding to restore the historic control room from the Apollo era.and more » [...]

CFB Finance

Marketwired

  • Crowdfunding
  • Crowdfund
  • Peer to Peer Lending
  • FinTech
  • Reg A+
  • Reg CF
  • Crowdfunding USA

Press Release

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |