2,536 crowdsourcing and crowdfunding sites
On Tuesday, the Crowdfund Intermediary Regulatory Advocates (CfIRA) sent recommendations to the Securities and Exchange Commission (SEC) regarding safe harbors. Safe harbors are provisions that reduce or eliminate liability, as long as companies act in good faith or within the established guidelines.
Such provisions aim to reduce uncertainty in markets by providing additional guidelines that companies may choose to follow in order to ensure compliance with the law. CfIRA’s proposals deal with several fundamental issues that relate to funding portals: posting criteria, fraud, crowd commentary, peer-to-peer lending, and matching investors with issuers.
Title III of the JOBS Act – the portion of the act that deals with crowdfunding – is ambiguous in its description of intermediaries’ powers. In order to shed light on these uncertainties, the SEC is currently hammering out more specific regulation. CfIRA’s recommendations are meant to help the SEC create rules that reflect the reality on the ground with regard to investment adviser regulations.
As CfIRA’s letter states, an investment adviser is “anyone who for compensation is engaged in the business of providing advice to others or issuing reports or analysis regarding securities.” There is worry that internet-based funding portals may be subject to investment adviser regulations in several ways. Funding portals may choose to post the offerings of certain issuers but not others. For example, a portal that focuses on a specific niche may refuse to feature an issuer who is outside the portal’s scope. Or, a portal may pull an issuer’s post if it finds potentially fraudulent information. A portal may also create search and information management tools in order to help investors find the businesses they wish to invest in most. In all of these cases, CfIRA is calling for safe harbors to ensure that portals would not be acting as advisers.
While it remains to be seen what regulations the SEC comes up with in the next several months – the final draft is expected to be published in January 2013 – it is encouraging that all parties are involved in the process to ensure that investors are protected and issuers are able to operate freely. CfIRA is hosting a symposium in mid-July that will bring together representatives from the White House, Congress, SEC and the Financial Industry Regulatory Authority (FINRA). Perhaps then, we will get some indication of where the SEC stands on key issues regarding funding portals.