When the JOBS Act passed in 2012, and the Regulation Crowdfunding Exemption (Reg CF) was introduced in 2015, many, including myself, saw it as a step-change toward democratizing access to capital. Suddenly, founders had a new avenue to seek funding for their businesses, even those whom venture capitalists and other institutional investors traditionally ignored. By the same stroke, millions of investors now had the opportunity to invest in early-stage companies. I still believe that Reg CF represents a profound improvement to the startup ecosystem, but broad-based adoption of the exemption will be in jeopardy if some in the industry continue to side-step key investor protections.
What’s Going On?
If you browse some funding portals, you’ll see a wide range of Reg CF offering pages from founders seeking capital. On those pages, you’ll generally find important details about the founders’ businesses, educational materials outlining potential risks, and a comments section where prospective investors can publicly ask questions or even voice concerns. Hosting these pages on the portals themselves is key to our mandate to ensure investor protection and compliance with SEC regulations.
Recently, though, some platforms have started allowing founders to host a portion of Reg CF offerings on their own web domain. Now, you might think: isn’t this just another step to empower founders and democratize access to capital? In my view, the answer is no, full stop. I believe that moving a portion of Reg CF offerings to founders’ websites undermines investor protections, compliance, and transparency in myriad ways. I have outlined these below.
Control and Responsibility
One of the core principles of Reg CF is investor protection. It’s the only way we can reasonably expect the public to adopt this style of investing. That’s why the rules and regulations mandate that issuers use a registered funding portal or a broker-dealer to facilitate their crowdfunding offering. This requirement is rooted in the need for a neutral third party to oversee and manage the offering.
This third-party oversight extends to critical functions like opening and closing the offering, updating information, addressing investor concerns, and ensuring compliance with all regulatory requirements. Placing a part of the offering on a founder’s web domain effectively cedes control to the startup, undermining the role of the funding portal.
Compliance and Oversight
Reg CF also places significant emphasis on compliance. The funding portal or broker-dealer must ensure that all aspects of the offering, including the content on the offering page, adhere to the rules and regulations set forth by the SEC. Why? In a word: investor protection.
Placing a portion of the offering on a startup’s domain introduces significant risk because it enables founders to potentially alter content, omit details relevant to investors’ decision-making, – or otherwise violate investor protection rules – without the portal’s or investors’ knowledge.
Educational Materials
Delivering educational materials to potential investors is more than a service funding portal provides; it’s a requirement of Reg CF itself – and it should be. These materials are essential to help investors understand the risks associated with crowdfunding investments, and the rules stipulate that it is the responsibility of the funding portal or broker-dealer to provide them.
When a portion of a Reg CF offering is hosted on a founder’s website, the portal’s ability to ensure that investors receive these materials and understand them is effectively compromised.
Commenting and Transparency
Reg CF is also designed to be transparent. That’s why portals are required to allow public comments and questions on their offering pages – that extends to what can sometimes be extremely harsh criticism as well.
When a Reg CF offering is partially hosted on a founder’s site, the portal can lose visibility into comments and how they are handled, if at all. This presents a significant risk to investors and the portal itself, which is required to ensure transparent and fair communications.
Further, portals have an obligation to monitor these communication channels for things like complaints or allegations of fraud or misleading information within the offering. If the comments are hosted outside of the portal, the ability to effectively monitor these channels – and review them for complaints that require resolution and reporting or to identify allegations of fraud that may require investigation – could be significantly compromised.
Conclusion
Look, as a founder of multiple tech startups myself, I’m empathetic to the idea that many entrepreneurs want domain ownership during their Reg CF offerings. But that misses the core issue. The regulatory framework behind Reg CF is designed to protect investors and maintain the integrity of crowdfunding campaigns – and placing a portion of offering pages under the control of a neutral third party, like a regulated funding portal or broker-dealer, is key to that mission. In my view, if some in the industry continue to ignore that mandate, we risk losing the faith investors have placed in crowdfunding and the long-term viability of our industry.
Howard Marks is currently the founder & CEO of StartEngine, one of the largest equity crowdfunding platforms in the US. Marks is the former co-founder of Activision Studios. StartEngine was launched in 2015 with the mission to help entrepreneurs achieve their dreams while enabling everyday people to access private investment opportunities. Combined with its recent asset acquisition of SeedInvest, today, StartEngine has a joint community of 1.8 million users who have collectively committed over $1.2 billion to startups. Beginning in 2020, Shark Tank’s Kevin O’Leary also joined StartEngine as a strategic advisor and spokesperson.
StartEngine Crowdfunding, Inc. is not a broker-dealer, funding portal, or investment adviser. StartEngine Capital, LLC is a funding portal registered with the U.S. Securities and Exchange Commission (SEC) and a member of the Financial Industry Regulatory Authority (FINRA). StartEngine Primary, LLC is a broker-dealer registered with the SEC and FINRA/SIPC. StartEngine Secondary is an alternative trading system regulated by the SEC and operated by StartEngine Primary.
