It’s hard to read any financial news media these days and not come across something related to crowd funding – it doesn’t take a great leap of faith to connect the dots and see the possibilities for driving small business development and innovation. However, there is of course a catch to all of the current crowd funding initiatives – at some point to really grow a real business actual accredited investors need to be able to come in and put their cash to work, a little bit above and beyond the trade for goods that drives the industry now. Well, it looks like accredited investors may soon get the opportunity – a whole bunch of sites are starting to pop up, but they are all currently waiting to see how the legislation pans out. Below are the current rules and regulations as given by a friend of ours who is a securities attorney:
Section 201(c) of the Jumpstart Our Business Startups Act (the “JOBS Act”), as codified in Section 4(b) of the Securities Act of 1933, expressly provides that entities engaged in hosting websites for the placement of accredited investor only offerings, are not required to register as a broker or a dealer.
The text of Section 4(b) of the Securities Act is as follows:
(b) (1) With respect to securities offered and sold in compliance with Rule 506 of Regulation D under this subchapter, no person who meets the conditions set forth in paragraph (2) shall be subject to registration as a broker or dealer pursuant to section 78o (a)(1) of this title, solely because-
(A) that person maintains a platform or mechanism that permits the offer, sale, purchase, or negotiation of or with respect to securities, or permits general solicitations, general advertisements, or similar or related activities by issuers of such securities, whether online, in person, or through any other means;
(B) that person or any person associated with that person co-invests in such securities; or
(C) that person or any person associated with that person provides ancillary services with respect to such securities.
(2) The exemption provided in paragraph (1) shall apply to any person described in such paragraph if-
(A) such person and each person associated with that person receives no compensation in connection with the purchase or sale of such security;
(B) such person and each person associated with that person does not have possession of customer funds or securities in connection with the purchase or sale of such security; and
(C) such person is not subject to a statutory disqualification as defined in section 78c (a)(39) of this title and does not have any person associated with that person subject to such a statutory disqualification.
(3) For the purposes of this subsection, the term “ancillary services” means-
(A) the provision of due diligence services, in connection with the offer, sale, purchase, or negotiation of such security, so long as such services do not include, for separate compensation, investment advice or recommendations to issuers or investors; and
(B) the provision of standardized documents to the issuers and investors, so long as such person or entity does not negotiate the terms of the issuance for and on behalf of third parties and issuers are not required to use the standardized documents as a condition of using the service.
If all of these conditions are met, you can host a site. However, since many of the aspects are difficult to meet without requiring broker dealer registration, every operating site that I am aware of today, is either a licensed broker dealer or partners with a licensed broker dealer (such as circle up and angel list).