Listening to the huge amount of talk being tossed around about the hot new topic of crowdfunding may have you confused. Whether you are looking at equity crowdfunding to help you launch your own business, or you simply want to understand better all the talk about the topic, you may be asking yourself, “what is a funding portal?”
The simple concept of crowdfunding, in which a project is funded by many small amounts of money from a large number of people, has become a complex and complicated topic, with politicians and organizations arguing about how best to handle this type of investing.
A solid understanding of equity crowdfunding begins by understanding what a funding portal is, and exactly how it works. In April of 2012, President Obama signed the Jumpstart Our Business Startups act, or JOBS Act. This act encouraged small business funding by easing some of the securities regulations, and made equity crowdfunding a more viable solution for many small businesses and startups. One of the conditions of this act is that the business must use either the services of an SEC registered broker/dealer, or a funding portal. There is a difference between a broker/dealer and a funding portal, and for someone who is looking to use crowdfunding, it is especially important to understand that difference.
Broker/Dealer – In the past, investing in businesses was limited to accredited investors. Being an accredited investor meant that the investor met one of the requirements of the SEC:
- Earn an annual individual income of more than $200,000 or a joint annual income of $300,000
- Have a net worth exceeding $1 million, individually or jointly
- Serve as a general partner, executive officer, director, or similar role for the issuer of a security being offered
Brokers/dealers are accredited investors who mainly deal in larger investments and businesses. Having to obtain guidance from one of these brokers/dealers prior to the JOBS Act limited the opportunities for smaller businesses and startups to gain investors.
Funding Portal – With the creation of the JOBS Act, a door was opened to non-accredited investors, or investors who did not meet the criteria of the SEC’s accreditation guidelines. These non-accredited investors are not held to the same reporting and registering requirements that accredited investors are. However, there are also limitations as to what a funding portal is allowed to do, such as:
- Offer investment advice or recommendations
- Solicit the purchase, sale, or offer to buy the securities offered
- Display the securities offered on the funding portal
- Compensate employees, agents, or other persons based on the sale of the securities
- Hold, manage, possess or otherwise handle investor funds or securities
These limitations separate the broker/dealer from the funding portal in terms of what they can do. However, it does make it possible for small businesses and startups to access a funding source that they were not previously able to tap into. A funding portal can help an entrepreneur or company by listing their idea or pitch, use a third party to manage the transferring of money or stock, help promote the idea, and offer supportive services that don’t fall under the limitations.
Now, besides these differentiators, the fees to be paid to the funding portal will always be lower than those charged by the broker/dealer, mainly because the broker/dealer must spend more money on compliance. In fact, the only reason the US Congress permitted the existence of funding portals is to make the capital formation more affordable.
If you are interested in learning more about funding portals, how to use crowdfunding as a resource for your venture, or other crowdfunding information, contact us. We would be glad to help you find your crowdfunding answers.