Investors: Know your online securities platforms

Exciting times, eh? With the lifting of the ban on “general solicitation” for offerings to accredited (rich) investors, all sorts of great start-up companies are advertising for investors. Who knew there were that many organic ice cream companies out there?

So accredited investors looking to invest small amounts to boost America’s small businesses are able to see all sorts of investment opportunities, and many different online platforms are being stood up to showcase these opportunities.

But investors need to know the difference between the types of platforms, because different platforms have different obligations, which an investor might think are important in making an investment decision.

Some online securities platforms are broker-dealers, registered with the SEC and FINRA. They may be operating under a different name from the broker-dealer; look at the bottom of the platform’s home page for the name of the broker and check whether the broker is registered here. Brokers generally make their money from charging a percentage of the amount raised. A registered broker has obligations with respect to “suitability” of the investment and also has an obligation to make a “reasonable investigation” of the issuer and its securities. It is liable under securities antifraud law for any misleading statements it makes. It may also be providing valuable advice and guidance to the issuer on the basis of its personnel’s experience in the securities industry and formal qualifications.

Some online platforms are structured as “Venture Capital Funds.” These do not have to be registered with the SEC or FINRA. They make most of their money on a successful “exit”; that is, they only make money when the companies they invest in are sold or make an IPO. It is therefore in their interest to invest in good, legitimate companies. They are also liable for any misstatements they make.

Some platforms are “bulletin boards.” These also do not have to be registered with the SEC. They provide a forum for a company raising funds to conduct its own offering, and provide all the tools (communications, verifying investor accreditation, help with executing the deal) the company needs. They generally let the company make all the communications about the offering, so their liability for misstatements is very limited (unless they could be found liable as a “willing participant” in a misleading statement, which is an untested form of legal liability).

 These platforms can look very similar, so if the extent to which the platform is involved in or responsible for an offering is important to you, you should make sure you know what sort of platform you are dealing with.

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