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Crowdfunding and Regulatory Compliance: A Discussion with ciValidator's Jeff Crump
editorial

Crowdfunding and Regulatory Compliance: A Discussion with ciValidator's Jeff Crump

We've written at length in the past on the maturation of crowdfunding and the need for support services to ensure the industry can reach its full potential, having covered topics like crowdfunding consultants and e-commerce platforms for crowdfunded products.

As equity crowdfunding gets closer to becoming a reality here in the U.S. and continues to grow abroad, platform owners will need to ensure they identify any and all fraudsters, and comply with a number of different regulations. In America, for example, that will mean everything from making sure backers are educated about investing to overseeing the amount of money people pledge so they don't invest more than they are allowed. Though the rules for equity crowdfunding are still being worked out by the S.E.C., a few companies have popped up offering due diligence and regulatory compliance solutions. One such company is ciValidator, which had its beta launch late last year. We got in touch with president and CEO Jeff Crump, who was kind enough to answer a few questions about his company over email. 

Anton Root, Crowdsourcing.org: How did you come up with the idea for ciValidator?

Jeff Crump, president and CEO of ciValidator: My background is in technology and business project management with a strong history working with financial services and banking clients such as Charles Schwab, JPMorgan Chase, ABN AMRO, Wells Fargo and Standard Bank of South Africa. I had been following the crowdfunding market for more than a year when I realized there was a need to provide a service to manage fraud and regulatory compliance in an automated and holistic manner.

Can you give a brief description on the services you offer?

We provide a suite of solutions that are all geared to support the diverse needs of crowdfunding and exempt securities. Our solutions include:

  • ciValidator:CORE – This is the central single sign-on solution that provides integrated protection against fraud through the combination of device and location risk ratings, identity verification and social trust determination. What is interesting about CORE is that it really is market agnostic. In other words, this combination of capabilities could serve any online company that needs to ensure it is protected from online threats and verify its users are real consumers, not fraudsters.
  • ciValidator:CP – This feature also supports fraud by monitoring and understanding the behavior of the crowdfunding users across our clients’ portals and platforms, which includes identifying any risk of entrepreneurs that are posting multiple rewards projects, equity issuers that are offering investments across one or more intermediary, and any borrower that is seeking multiple peer-to-peer loans. It also monitors and enforces regulatory limits for equity crowdfunding investor limits based on net income or net worth (once that becomes a reality in the US).
  • ciValidator:BG – BG stands for background and in the case of current broker-dealers and future equity crowdfunding portals, these intermediaries must comply with the requirement to conduct issuer background checks and securities enforcement regulatory history checks. The background check service is not just limited to the individuals associated with the issuer but the issuer company as well. The nice thing about this capability is that we can do in 24-72 hours what it takes other firms weeks to do. Plus our cost for this service is dramatically less than hiring a legal team to perform the checks.
  • AIVS – Our Accredited Investor Verification Service is designed to solve a key issue associated with Title II changes from the JOBS Act. As part of the change it will require that intermediaries take “reasonable steps to verify” that a person actually meets the requirements for an accredited investor. Our service not only solves this but by issuing an electronic certificate to each accredited investor they can take this with them from broker to broker without having to prove again and again that they meet the criteria.
  • CIE – One area of both Title II and Title III that has received little attention is around affirmation of knowledge requirements for investors. This is why we recently launched our Certificate of Investor Education online course. This course only takes 45-90 minutes to complete and both educates the student and performs the verification or affirmation of knowledge. We are exploring some more streamlined options for intermediaries but the net/net is that we are solving for this in an effort to help with regulatory compliance.

Who is best suited to benefit from your services?

We feel like our solutions really touch on the entire crowdfunding and exempt offerings eco-system. We also feel like we are doing our part to support whatever resulting frameworks governments and/or self-regulating organizations issue.

What sort of information will you be collecting about the entrepreneurs? Are you worried about individuals expressing privacy concerns?

We collect a wide array of data about users, which is required to provide the robust set of value we deliver. That said, what we do collect is fairly standard for today’s online consumer. We take privacy seriously and have implemented a solution to reflect that stance. Our application and data are hosted in a secure environment also being utilized by enterprise-class companies such as Best Buy, CareerBuilder and ASICS. The data center has been accredited under ISO 27001, SOC 1/SSAE 16/ISAE 3402 (formerly SAS 70 Type II), PCI Level 1, FISMA Moderate and Sarbanes-Oxley (SOX). Our database is encrypted and the integrity of data transmission is protected through the implementation of the secure OAuth protocol, SSL and license-protected APIs.

Can you elaborate on the hub-and-spoke model?

Simply put, ciValidator:CORE is the hub and the spokes are comprised of our own products, client systems and our integration partners. The spokes connect into the hub and each client gains the knowledge and power of aggregated information from across the spokes.

Equity crowdfunding law is still only on the horizon in the US, so how will you make sure that you comply with all the appropriate laws when the SEC finalizes the regulation?

The beauty of our hub-and-spoke model is the speed in which we can react to a changing set of requirements. Needless to say, we built some capabilities based on what we know today but architected to accommodate the future. To be honest, we had to because we intend to serve an international audience.

Do you plan to offer your services overseas?

Yes. We have the ability to support more than 200 countries but our roll-out will occur in a phased fashion.

How do you ensure that fraudsters are identified?

Without giving away too much information about our secret sauce I can tell you we have put in place technologies that are world-class. We feel very strongly that our services will provide an unprecedented layer of protection and intelligence to help mitigate the risk of fraud beginning at the point of account origination and carrying through historical analysis of user behavior. For example, one interesting feature we provide is to conduct two-factor authentication of users who trigger a behavioral warning in our system. Another advanced feature, and one that supports FFIEC requirements, is to use dynamic knowledge-based questions to verify the identity of an individual.

When will you launch your services to the public?

We expect to move from limited beta to general availability in February 2013.

How much will you charge for your services?

For CORE and CP, we have developed three pricing tiers to address the needs of the start-up client, the growth-mode client and the well-established client. Pricing will include a fixed monthly cost (as low as $9.99 per month) and per-transaction fees. Our BG service is a flat fee of $149.00 per individual and/or company. Our AIVS and CIE are priced at $34.95 and $19.95 respectively or $44.95 as a bundle. However, we offer aggressive wholesale pricing and unique customizations for intermediaries.

What are your plans for the future?

Great question! Rapidly adapting to the resulting regulatory changes will be at the top of our list for US clients but beyond that we will be looking at increasing value through strategic partnerships, supporting regulatory requirements for international clients and language localization.

Any other comments before we wrap up?

In today’s complex and interconnected world the source of potential fraud is multifaceted; it extends well-beyond the obvious so keeping an open mind to where a threat may come from is recommended. A prudent participant in this market, like other financially-centric markets, has a reasonable expectation that the interests of all parties are protected. Working together logically towards establishing a safe environment just makes sense and will undoubtedly benefit all who participate in the marketplace.

In closing, your readers may be interested to know that our company culture is based in collaboration. We absolutely love partnering and partnerships. We love striking up mutually-beneficial deals. And, we are highly flexible. If there is something we offer that just doesn’t fit then let us know and we will see how we can tweak it to provide value.

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