Frequently Asked Questions (FAQs) on Regulation Crowdfunding
Published: December 20, 2023
The following is a set of FAQs on Regulation Crowdfunding for the guidance of FINRA members. For additional information, visit our Funding Portal webpage.
Who Can Engage in Regulation Crowdfunding Transactions?
Q1. Who can offer or sell securities under Regulation Crowdfunding?
A1. Regulation Crowdfunding allows eligible issuers1 to offer and sell securities through the platform of a broker-dealer or funding portal that is both registered with the SEC and a FINRA member (an “intermediary”). This activity must be conducted exclusively through the platform of a single intermediary. A firm cannot act as an intermediary if it is not a registered broker-dealer or a registered funding portal, and is not a member of FINRA.
Q2. My firm is a registered broker-dealer and a member of FINRA. We want to begin making Regulation Crowdfunding offerings available on our platform to our customers. Do we have to notify FINRA?
A2. Yes. As a broker-dealer member, your firm is subject to FINRA Rule 4518, which requires, in part, that your firm must notify FINRA prior to engaging, for the first time, in a transaction involving the offer or sale of securities under Regulation Crowdfunding. To provide the required notification, please visit FINRA Gateway’s Business Activity page to update your firm profile.
In addition to providing the required notification to FINRA, members may also need to apply for approval of a material change in business operations by filing a continuing membership application (CMA) with the Membership Application Program (MAP) Group using Form CMA and paying related fees – unless they are already approved by FINRA to engage in private placements or underwriting. Generally, a member that is already approved by FINRA to engage in private placements or underwriting would not need to file a CMA if they plan to engage in Regulation Crowdfunding activity. For more information, please refer to Regulatory Notice 16-07.
Q3. Is it permissible for an issuer to conduct a Regulation Crowdfunding offering on its own website? What if the issuer’s website says that my firm is the intermediary for the offering?
A3. No. An issuer may not conduct a Regulation Crowdfunding offering on its own website. As discussed above, a transaction involving the offer or sale of securities under Regulation Crowdfunding must be conducted exclusively through the platform of a single intermediary. The platform must display in such manner that it is clear to viewers and users that the platform is that of the intermediary. Posting a statement on the issuer’s website that your firm is the intermediary for the offering would not suffice to make this activity consistent with Regulation Crowdfunding.
Testing the Waters
Q4. What are “testing the waters” communications? Who is allowed to “test the waters” for investor interest in a potential offering under Regulation Crowdfunding?
A4. At any time before the filing of the Form C offering statement, an issuer, subject to specified conditions, is permitted to communicate orally or in writing to determine whether there is any interest in a contemplated offering. These are commonly referred to as “testing the waters” communications and are governed by the requirements of Rule 206 under Regulation Crowdfunding. “Testing the waters” communications are subject to the antifraud provisions of the federal securities laws.
Q5. Can an intermediary “test the waters” for investor interest in an offering?
A5. No. Rule 206 by its terms permits only issuers to engage in “testing the waters” communications. Issuers are not prohibited from engaging in these communications through your firm’s platform; however, any “testing the waters” communication through your firm’s platform must conform with the requirements of Rule 206. Such communications must state that:
- no money or other consideration is being solicited, and if sent in response, will not be accepted;
- no offer to buy the securities can be accepted and no part of the purchase price can be received until the offering statement is filed and only through an intermediary's platform; and
- a person's indication of interest involves no obligation or commitment of any kind.
Any testing the waters communication through your firm’s platform must be presented to viewers and users of the platform in such manner that it is clear the communication is a communication by the issuer.
Public Availability of Information
Q6. After the Form C offering statement is filed with the SEC, is it permissible for an intermediary to make information about a Regulation Crowdfunding offering available only via a private link or private web page that is not publicly accessible to all viewers of the intermediary’s platform?
A6. No. Rule 303 under Regulation Crowdfunding requires the intermediary to make publicly available any information required to be provided by the issuer under Rule 201 and Rule 203(a). This information must be publicly available on the intermediary's platform in a manner that reasonably permits a person accessing the platform to save, download, or otherwise store the information. Additionally, this information must be publicly available on the intermediary’s platform for a minimum of 21 days before any securities are sold in the offering. To make such information accessible only via a private link or private web page is therefore inconsistent with the requirement to make information publicly available, and any offers and sales made pursuant to such a process cannot claim an exemption under Regulation Crowdfunding.
Highlighting Offerings
Q7. Is it permissible for a funding portal to highlight specific Regulation Crowdfunding offerings on its platform using terms such as “Hot this week,” “Almost Sold Out,” “Invest Now!,” “Last Chance,” or “Don’t miss this opportunity,” or similar terminology?
A7. No. This type of language would not be consistent with Regulation Crowdfunding because it is not based on objective criteria and may have the effect of urging investors to purchase the securities of the specific issuer or issuers. Rule 402 under Regulation Crowdfunding permits a funding portal to apply objective criteria to highlight offerings on the funding portal's platform where the criteria are reasonably designed to highlight a broad selection of issuers, are applied consistently to all issuers and offerings, and are clearly displayed on the funding portal’s platform. The criteria may include, among other things:
- the type of securities being offered;
- the geographic location of the issuer;
- the industry or business segment of the issuer;
- the number or amount of investment commitments made;
- progress in meeting the target offering amount or, if applicable, the maximum offering amount; and
- the minimum or maximum investment amount.
A funding portal may not highlight an issuer or offering based on the advisability of investing in the issuer or its offering. Further, a funding portal may not offer investment advice or recommendations or solicit purchases, sales or offers to buy the securities offered or displayed on its platform.
1 Certain issuers are not eligible to offer and sell securities under Regulation Crowdfunding. The Adopting Release for Regulation Crowdfunding states that ineligible issuers “include non-U.S. companies, companies that already are Exchange Act reporting companies, certain investment companies, companies that are disqualified under Regulation Crowdfunding’s disqualification rules, companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding during the two years immediately preceding the filing of the offering statement, and companies that have no specific business plan or have indicated their business plan is to engage in a merger or acquisition with an unidentified company or companies.” See Securities Exchange Act Release No. 76324 (October 30, 2015), 80 FR 71388 (November 16, 2015) (Final Rule: Crowdfunding), available at https://www.govinfo.gov/content/pkg/FR-2015-11-16/pdf/2015-28220.pdf.