Investors and founders exploring investment crowdfunding under regulations like Reg CF and Reg A+ encounter two primary types of “crowdfunding intermediaries”: Funding Portals and Broker-Dealers. Understanding the distinctions between these entities is essential, as they impact the potential quality, variety, and structure of investment opportunities available.
In this post, we’ll break down the roles of these intermediaries, highlight their differences, and help both investors and founders navigate this space effectively.
What Are Crowdfunding Intermediaries?
Under Reg CF, businesses raising capital cannot directly solicit investments from the public. Instead, they must conduct offerings through regulated intermediaries: either Funding Portals or Broker-Dealers. These entities act as the bridge between startups and investors, ensuring compliance with SEC regulations.
Common Responsibilities for Both Intermediaries
Regardless of type, intermediaries must:
- Register with the SEC and be members of FINRA: Ensures compliance with federal securities laws and proper oversight.
- Conduct background checks on key stakeholders: This includes officers, directors, and individuals holding 20% or more equity.
- Enforce “bad actor” checks: Prevents companies or individuals with disqualifying events (like prior fraud) from raising capital.
- Adhere to anti-fraud and anti-manipulation rules: Protects investors from deceptive practices.
What Are Funding Portals?
Funding Portals are unique to the investment crowdfunding ecosystem, created under Title III of the JOBS Act. They serve as online platforms where startups can connect with investors. While funding portals are essential in expanding access to early-stage investments, they are more restricted in their operations compared to Broker-Dealers.
By law, Funding Portals cannot:
- Offer investment advice or make recommendations.
- Solicit the purchase or sale of securities.
- Handle investor funds or securities directly.
- Compensate agents or employees for securing investments.
Example: Handling Investor Funds
Funding Portals are prohibited from handling investor funds or securities directly. They typically collaborate with qualified third-party institutions, such as escrow agents or banks, to manage the movement and custody of funds during transactions. For example, platforms like Netcapital and Republic may work with transfer agents such as North Capital or escrow providers to process and secure investor funds. This ensures compliance with SEC regulations while protecting investor money during transactions.
Objective Rules for Deal Promotion
Another key restriction is that Funding Portals cannot selectively promote certain deals to specific investors. Unlike Broker-Dealers, which can tailor recommendations, Funding Portals must apply objective criteria for determining what deals are featured on their homepage or in email communications. For instance, platforms like Republic may feature deals based on funding progress, trending popularity, or timing (e.g., campaigns nearing their close date) but cannot highlight deals based on subjective or personalized recommendations.
Funding Portals are restricted from compensating any person for soliciting purchases, sales, or offers to buy securities displayed on their platform. This prohibition aims to prevent activities akin to solicitation, which Funding Portals are not permitted to engage in.
Think of Funding Portals as the “lite” version of Broker-Dealers. They are subject to fewer regulations but, as a result, have stricter limitations on their operations and the services they can offer.
Examples of Funding Portals
Some prominent Funding Portals include:
- Wefunder: One of the largest platforms by deal volume.
- Republic (OpenDeal Portal LLC): Known for additional curation and a focus on social impact businesses.
- Netcapital: Focused on offering simple and affordable access to early-stage investments.
What Are Broker-Dealers?
Broker-Dealers, by contrast, are more highly-regulated entities in the financial industry and thus enjoy greater flexibility. They are held to stricter regulatory standards, such as Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements.
Broker-Dealers can:
- Provide investment advice and recommendations.
- Solicit and promote securities.
- Directly manage investor funds and securities.
Examples: DealMaker Securities, Dalmore Group, and StartEngine (StartEngine Primary LLC).
Key Differences: Funding Portals vs. Broker-Dealers
Both Funding Portals and Broker-Dealers are required to have a reasonable basis for believing that issuers comply with Reg CF requirements. This includes conducting background and securities enforcement regulatory history checks on issuers and their officers, directors, and significant shareholders. While Broker-Dealers may perform more extensive due diligence due to broader regulatory obligations, Funding Portals must still ensure compliance to protect investors.
What This Means for Investors
Stricter Standards ≠ Better Deals
While broker-dealers conduct more rigorous due diligence and have additional regulatory considerations, this doesn’t guarantee higher-quality offerings. Funding portals may curate deals based on self-imposed criteria, and some, like Republic, enforce higher standards than required by law.
Remember, the type of due diligence typically done by funding platforms is primarily to prevent fraud — which does NOT necessarily mean that you are getting access to better investment opportunities.
Due Diligence and Compliance
Broker-dealers are mandated to adhere to stringent regulatory standards, including Know Your Customer (KYC) and Anti-Money Laundering (AML) protocols, which may offer investors an added layer of security. In contrast, funding portals are not obligated to follow these specific standards.
Investment Advice and Solicitation
Broker-dealers are permitted to provide investment advice and actively solicit investments, potentially guiding investors toward opportunities that align with their goals. Funding portals, however, are prohibited from offering personalized investment advice or recommendations.
Types of Offerings
Broker-dealers can present a broader spectrum of investment opportunities, including those exclusive to accredited investors, such as Regulation D offerings. Funding portals primarily facilitate Reg CF offerings, accessible to both accredited and non-accredited investors.
What This Means for Founders
As a founder, your choice between a funding portal and a broker-dealer depends on your fundraising goals and target audience:
- Funding Portals: Potentially lower up-front cost (not always on commissions), easier entry, and access to a broad pool of retail investors.
- Broker-Dealers: Higher credibility, stricter screening, and potential access to larger investors and more flexibility in soliciting investments. Some broker-dealers may also offer lower final-value fees relative to funding portals, especially if you plan to do more of the marketing yourself or bring your own audience of potential investors.
Regulatory Compliance and Flexibility: Collaborating with a broker-dealer may necessitate more comprehensive compliance measures, including thorough due diligence and adherence to KYC and AML regulations. This can enhance credibility with investors but may also introduce additional procedural requirements. Funding portals, while subject to regulatory oversight, operate under a different set of constraints, potentially offering a more streamlined process.
Services and Limitations: Broker-dealers can offer a wider array of services, including investment advice, solicitation, and direct handling of investor funds, which can be advantageous for structuring and marketing the offering. Funding portals are restricted from providing investment advice or directly handling funds, which may influence the level of support available during the fundraising process.
How to Identify an Intermediary Type
You can verify whether a platform is a Funding Portal or Broker-Dealer by:
- Checking their website footer or About Us page.
- Searching on FINRA’s databases:
Many of the platforms – such as StartEngine – may have multiple legal entities of each type. For example, one entity that operates as a funding portal for the Reg CF offerings, and one that operates as a broker-dealer for certain Reg A+, Reg D, or other offerings (and sometimes a third entity that is the owner of all these other subsidiaries).
Also, note that when searching for the entity’s name on the above links, the legal name of the entity may be different than the common name of the website. For example, Republic’s legal entities are OpenDeal Portal LLC (the funding portal arm) and OpenDeal Broker LLC (the broker dealer entity), while the website itself is owned and maintained by OpenDeal, Inc.
Choosing the Right Intermediary
For Investors, consider:
- Deal Flow: Quantity and quality of opportunities.
- Due Diligence: Self-imposed standards beyond regulatory requirements.
- Fees: Are there additional investor fees?
- Secondary Markets: Can you sell your shares later?
For Founders, weigh:
- Cost: Broker-dealers may charge more fees for their services, but may be able to offer more help in advertising and soliciting your offer.
- Requirements: Broker-dealers might reject your offering if it doesn’t meet stricter standards.
- Target Investors: Some funding portals provide an open “marketplace” experience for complete strangers to find your offering. Others, and some broker dealers, may require you to advertise to a select audience – which can give you more control over your marketing and your message, but may decrease the odds of complete strangers finding your offering.
Final Thoughts
Both funding portals and broker-dealers play crucial roles in the equity crowdfunding ecosystem, offering unique advantages for both investors and founders. Your choice should align with your investment goals or fundraising strategy. By understanding these differences, you can navigate the world of online private markets with confidence.
If you need any help as a founder choosing which funding platform to choose, check out our raisepapers business for founders. We have some of the top experts in our industry who have worked on hundreds of offerings, and we can help to answer any questions you might have in getting started.
