2,020 crowdsourcing and crowdfunding sites
Editor's Note: The following is a guest post from attorney Douglas S. Ellenoff, who attended the meeting between CFIRA members and the SEC staff last week. Also be sure to read our earlier story on the meeting.
On Friday, a group of Crowdfunding industry leaders travelled to Washington, DC and met with a large gathering of staff members of the SEC from several different divisions, including, Corporate Finance, Trading and Markets and the Office of Compliance Inspections.
Discussions between the group and staff members went on for an hour and a half and covered many aspects of the new law, how the industry currently operates and how both the SEC and FINRA will register and regulate the portals.
Management of existing portals shared their insights with the staff about how existing infrastructure, computing and fraud detection systems operate. Additional information was provided to the SEC about how existing donation and rewards-based portals interact with both donors and those seeking contributions (i.e. the current due diligence being conducted and how it might improve).
The SEC was clear that any equity crowdfunding portal would not be permitted to hold funds and that a third party escrow agent would have to be so engaged. What is evident as well is that there will need to be a better defined minimum requirement of what is expected of a portal in both accepting proposed business opportunities and investors.
The industry members emphasized the need to practically reduce the scale of such responsibilities as much as possible (hopefully automating as much as possible) to accommodate for the economics of the raises but nonetheless do as much as necessary to effectively reduce the likelihood of any fraud.
Inquiry was made of the staff about how much of the portals' due diligence responsibilities could be satisfied, like in any private placement, by relying on representations and warranties of both issuers and investors.
Some discussion centered around the nature of the securities being offered and whether it would make sense to simplify the process by limiting the type of securities to just common stock. The staff did inquire about the long term nature of the investments and whether there was any consideration as to what liquidity events are expected, including holding periods.
The staff emphasized its reading of the Act that issuers were prohibited from soliciting investors and that portals may market and advertise to promote the portal itself to attract investors (but they may not pay or compensate for same) but not the individual funding opportunities. Also, the SEC wants the industry to understand that until the new rules and regulations have been established by the SEC, equity crowdfunding is impermissible.
Representatives of the portals highlighted their concern that the SEC needs to address in greater detail what activities of the portal will be acceptable and not be deemed investment advice and what will be considered "ok."
There was also discussion about the "21 day cooling off period" -- what it means and when it starts. The staff indicated its recognition of the issue and will review and consider. The industry also pointed out that the SEC has certain discretion in the Act with respect to raising the $500,000 threshold with respect to requiring audited figures by the issuer and requested that it be considered.
Throughout the discussion, the SEC emphasized its interest in receiving comments to the Act on its website and encouraged the larger community to submit questions and comments.