Two of the most successful investment crowdfunding platforms, Wefunder and StartEngine, have been hit with penalties by FINRA.
According to a statement by FINRA, Wefunder has been assessed with a $1.4 million fine and StartEngine must pay $350,000 in regards to failing to comply with laws and rules designed to protect crowdfunding investors. Both funding portals have accepted FINRA’s decision and consented to the penalties without admitting or denying the allegations.
Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement, commented on the action:
“Funding portals perform an important gatekeeping role for securities that are offered to investors under Regulation CF, the crowdfunding exemption from securities registration. Today’s actions highlight FINRA’s vigilance over this developing area of securities regulation and our unrelenting focus on investor protection.”
Regarding the enforcement action impacting Wefunder, FINRA states that from 2016 through 2021, across 39 separate offerings, Wefunder raised approximately $20 million more than permitted under crowdfunding raise limits. Wefunder apparently accomplished this by diverting the excess funds raised in the crowdfunding offering to a subsequent offering conducted under a different exemption from registration. FINRA states that by doing so, Wefunder exceeded the scope of its permitted activities as a funding portal.
As for StartEngine, FINRA says it found that at various points between November 2016 and January 2018, StartEngine included issuer communications on its funding portal website that it knew or had reason to know were false or misleading; posted its own inaccurate counts of the number of investors in the offerings on its portal; and failed to reasonably supervise potentially misleading issuer-prepared content.
FINRA cited the following example to outline the alleged transgression by StartEngine. As described by FINRA, one issuer, whose product was a home robot, the robot’s level of functionality in a demonstration video posted on the StartEngine website was exagerated. The video depicted the robot independently performing tasks such as waking sleeping family members, teaching a child piano and art, projecting a recipe onto a cutting board, and more. FINRA says that during the offering, StartEngine received information that caused it to know or had reason to know that these claims were exaggerated and misleading, but it failed to correct them. While FINRA admits there was a disclaimer on the offering page noting that the robot was a work-in-progress, FINRA believes it was insufficient to remediate the misleading content.
As part of the settlement with Wefunder, the investment platform will be required to retain an independent consultant to make recommendations to improve its systems and procedures.
FINRA added that it regularly examines and conducts surveillance of funding portal members to determine compliance with FINRA’s funding portal rules and SEC requirements.
Funding portals are a relatively new, regulated entity that was created by the JOBS Act of 2012. Under the law, these platforms may issue securities under Reg CF (Regulation Crowdfunding). Funding portals are regulated by FINRA and must be approved to provide securities crowdfunding services online.