Much excitement has been generated with the enactment of Regulation Crowdfunding (Reg CF) and the ability of non-accredited investors to invest in startup companies in the United States. The SEC recently reported that while early capital raising efforts is still growing, Regulation Crowdfunding has provided a new mechanism for small, domestic issuers to raise capital that was previously unavailable.
There is speculation that soon, with a Republican Administration in Washington focused on deregulation, Regulation Crowdfunding may be a “huge” beneficiary, including an expansion permitting an issuer to raise $5 or perhaps even $10 million per annum, rather than the current $1 million limit. While a common complaint during its first year is that the issuers themselves must be domestic United States companies, the same does not hold true for crowdfunding portals.
Regulation Crowdfunding specifically permits “nonresident” funding portals to operate in the United States.
A nonresident funding portal is a funding portal incorporated in or organized under the laws of a jurisdiction outside of the United States, or having its principal place of business in any place not in the United States. Thus you can operate overseas and still be permitted to engage in business as a U.S. funding portal.
Nonresident portals can quickly broaden US crowdfunding efforts to overseas, and raise foreign investor (crowd) capital for US companies. This together with the benefit that a crowdfunding portal is specifically exempt from broker-dealer registration under Exchange Act section 15(a), provides ample incentive to foreign entrepreneurs to seek to participate in US small issuer capital formation.
Nonresident funding portals share the same benefits as domestic funding portals, including the right to post offerings on their portal and receive transaction-based compensation (commission and equity) for their services. Nonresident funding portals may even have a competitive advantage in accessing capital for US crowdfunding offerings. MrCrowd.com and its CEO Allen Au, based in Hong Kong, appear to be the first nonresident funding portal to see an opportunity and become registered with FINRA.
For the US Securities and Exchange Commission (SEC) to permit nonresident funding portals to be based outside of the US, the portals must be subject to SEC and Financial Industry Regulatory Authority (FINRA) regulation. Registration of a nonresident portal is conditioned on an information sharing arrangement in place between the SEC and the competent regulator in the jurisdiction under the laws where the nonresident funding portal is organized or has its principal place of business.
The rules are largely designed to ensure that the SEC and FINRA can access the books and records of, conduct examinations and inspections of, and enforce US laws and regulations of nonresident funding portals that are not based in the United States.
Each nonresident funding portal to become registered is required to obtain a written consent and power of attorney appointing an agent in the United States who may be served legal process in an action under the federal securities laws. This consent and power of attorney must be signed by the nonresident funding portal and the agent for service of process.
Any change of the agent for service of process must be promptly communicated to the SEC. Each portal must maintain, as part of its books and records, the written consent and power of attorney.
The nonresident funding portal must also certify that it can, as a matter of law, and will, provide the SEC and FINRA with prompt access to its books and records, and will submit to onsite inspection and examination by the SEC and FINRA. It must provide an opinion of counsel that the portal can, as a matter of law in the country where it operates, provide the SEC and FINRA with prompt access to its books and records and can, as a matter of law, submit to onsite inspection and examination by the SEC and FINRA.
The portal must re-certify after any changes in the legal or regulatory framework impacts the portal’s ability to provide the SEC and FINRA with prompt access to its books and records. The re-certification must be accompanied by a revised opinion of counsel describing how the portal can continue to meet its obligations to produce records and be inspected.
Any person interested in conducting a crowdfunding portal business in the United States from overseas must ensure they are in compliance with Regulation Crowdfunding rules, as well as the local securities laws in the country where it anticipates doing business. Before entering this business, be sure to consult competent securities counsel to ensure your activities meet all legal requirements.
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Scott Andersen is principal at finLawyer.com. He has also been Deputy Regional Chief Counsel at FINRA, Enforcement Director at FINRA and the NYSE, Co-Chief of the Securities Prosecutions Unit of the NY Attorney General’s office, and Asst. Attorney General for the State of NY. In these roles, he has been investigated, prosecuted and supervised criminal, civil and regulatory enforcement actions for over nineteen years. He concentrates his practice on SEC, FINRA and state regulatory defense and securities regulatory counseling, as well as working with crowdfunding portals, funding platforms, broker-dealers and fintech providers on regulatory compliance matters He can be reached at sandersen@finLawyer.com.
George Georgiades is an experienced securities lawyer and founder of Georgiades & Associates (www.AltFinEsq.com), a boutique securities law firm based in New York City focusing its practice on alternative finance transactions such as Crowdfunding, Regulation A+, and other technology-driven financings. His experiences range from serving as in-house counsel to a leading middle-market broker-dealer, regulatory counsel to a registered investment advisor ($4.2B AUM) and capital markets associate at a leading New York City corporate finance law firm. We routinely advise startups, investment advisors, funding platforms and broker-dealers in the United States and abroad. He can be reached at george@altfinesq.com.
The information and materials in this article are provided for general informational purposes only and are not intended to be legal advice. The issues discussed include complicated areas of law and legal advice should be obtained from a securities attorney about your specific circumstances.