With the very recent advent of equity crowdfunding, start-up businesses now have the opportunity to receive funding by offering and selling securities to the general public. In order to govern this new method of a securities transaction, the SEC issued Regulation CF (for CrowdFunding).
In a bulletin published by the SEC concerning the advertisement of crowdfunded investments, it stated that “[c]ompanies may not offer crowdfunding investments to [potential investors] directly—they must use a broker-dealer or a funding portal.”[i] To further protect investors, these “intermediaries” must be registered with the SEC and also be a member of FINRA.[ii]
Rule 302(c) of Regulation CF goes into greater detail about what is required of intermediaries who are using promoters.
- Intermediaries must inform investors when the account opens that any paid promoter of securities “must clearly disclose in all communications on the platform the receipt of the compensation and the fact that he or she is engaging in promotional activities on behalf of the issuer.”[iii]
- “[P]romoters will also be required to comply with Section 17(b) of the Securities Act, which requires promoters to fully disclose to investors the receipt, whether past or prospective, of consideration and the amount of that compensation.”[iv]
These measures are intended to protect investors from being unduly influenced to purchase securities by paid promoters whom the investors believed were an unbiased third party.[v]
[v] For an interesting article on what can happen when a paid promoter doesn’t disclose his compensation see https://www.sec.gov/news/pressrelease/2016-60.html.