Crowdfunding platforms and portals: how they work

Investment crowdfunding platforms are websites that let a company sell securities, such as shares or notes, to many individual investors online. In the United States, the main legal route is Regulation Crowdfunding, often called Reg CF, which requires every offering to run through an intermediary registered with the SEC. That intermediary is either a broker-dealer or a type of firm created for this purpose, the funding portal. This guide explains how the platforms work, what they must do and how they differ from reward-based sites that sell products rather than securities.

In brief

• Reg CF lets a company raise up to $5 million in a 12-month period, according to the SEC.
• All Reg CF transactions must take place online through an SEC-registered intermediary: a broker-dealer or a funding portal.
• A funding portal must also be a FINRA member.
• Securities bought in a crowdfunding offering generally cannot be resold for one year.
• Donation and reward crowdfunding are different: they do not involve selling securities.

Two kinds of crowdfunding

The word “crowdfunding” covers several models, and the legal rules differ.

Donation and reward crowdfunding lets backers give money or pre-order a product. Backers receive no ownership stake and no share of profits. Securities laws generally do not govern these campaigns, though consumer protection rules still apply.

Investment crowdfunding sells securities. Backers become investors, with equity, debt or a revenue-share instrument, and the offering must be registered or fit an exemption from registration. Reg CF is the exemption designed for small online offerings open to the general public. Companies can also use other exemptions, such as Regulation A or Rule 506 of Regulation D, but those follow different rules, which our companion guide on raising capital online compares.

The legal framework

Reg CF was authorized by Title III of the JOBS Act and implemented by SEC rules. The SEC’s overview of exempt offerings describes the rule this way: offerings of up to $5 million, with securities sold online through a registered broker-dealer or a registered funding portal. The SEC’s Reg CF page repeats the $5 million ceiling for any 12-month period and says that issuers must disclose information in filings with the SEC and to investors and the intermediary.

The SEC also says individual non-accredited investors face limits on how much they can invest across all crowdfunding offerings in a 12-month period. Those investor limits depend on the investor’s circumstances, so consult the SEC’s investor guidance and Regulation Crowdfunding itself on eCFR for the current formula before relying on any number.

What a platform does

An intermediary is more than a marketplace. Regulation Crowdfunding makes it a gatekeeper, and a typical platform performs these functions:

• Listing and onboarding. It reviews and accepts issuers, collects their disclosures and publishes the offering page where investors can read them.
• Investor education and account opening. It gives investors the educational material the rules call for and records their eligibility and investment amounts.
• Communication channel. It hosts the discussion area where investors can ask questions and the issuer can respond.
• Handling of funds. Investor money is generally held with a qualified third party, such as a bank or escrow agent, until the offering target is reached. If an offering does not meet its stated target by the deadline, investors are returned their funds.
• Closing and records. It processes the close, tracks investor holdings and supports later communications.

The exact obligations are in the SEC’s Regulation Crowdfunding rules (17 CFR Part 227) and FINRA’s funding portal rules.

Broker-dealers versus funding portals

A broker-dealer can run a crowdfunding platform in addition to its other services. A funding portal is a narrower category. According to FINRA, it is a crowdfunding intermediary that registers with the SEC as a funding portal and becomes a FINRA funding portal member, and it operates under Title III of the JOBS Act, SEC Regulation Crowdfunding and FINRA’s Funding Portal Rules.

FINRA’s page adds that a firm cannot act as an intermediary unless it is both a registered funding portal (or broker-dealer) and a FINRA member. Funding portals file a Form Funding Portal with the SEC through EDGAR, and members must file an annual statement of revenue within 60 calendar days after year-end. FINRA points readers to its Funding Portal Rules and its guidance checklist for the full list of permitted and prohibited activities.

An investor can check a firm’s status in the SEC and FINRA registries before investing.

How an offering runs, step by step

1. The issuer picks an intermediary. The SEC notes that an offering must be conducted exclusively through the platform of a single intermediary.
2. The issuer prepares disclosures. These are filed with the SEC and made available to investors and the intermediary. They describe the business, its financial condition, the securities and the terms of the offer.
3. The offering goes live. The platform publishes the materials, a target amount and a deadline.
4. Investors commit funds. They create accounts, acknowledge the risks and invest, subject to the limits that apply to them.
5. The offering closes. If the target is met, funds are released to the company and the securities are issued. If not, the money is returned.
6. Ongoing reporting. Issuers follow up with the SEC and investors, in line with the rules in force.

What issuers should weigh before choosing a platform

For a company, the choice of intermediary is a business decision as much as a legal one. Platforms differ in the types of companies they accept, the security structures they support, the fees they charge and the investor communities they reach. Some concentrate on consumer brands and local businesses, others on technology startups or real estate. Because the SEC requires an offering to be conducted exclusively through one intermediary’s platform, switching mid-campaign is not an option, so issuers generally compare track records, fee schedules and the quality of the platform’s compliance review before signing.

Issuers should also plan for what comes after the close. Crowdfunding can add hundreds or thousands of small holders to the cap table. That raises practical questions about investor communication, voting, future financing rounds and how the company will keep filing the information the rules require. Many issuers use a custodian or a special purpose vehicle to simplify the ownership structure, and the platform’s materials usually explain the options.

Key risks and limits for investors

The SEC’s materials emphasize several features of crowdfunding investments:

• Illiquidity. Securities bought in a crowdfunding transaction generally cannot be resold for one year, and a market for them may never develop afterward.
• Early-stage risk. Many issuers are young companies without established revenue. Investors can lose everything they put in.
• Bad actor provisions. Offerings are subject to disqualification rules that can bar issuers and certain related persons with specified disciplinary histories.
• Limited information. The disclosure is lighter than a full registered offering, so investors should read the offering page and the filings closely.

Example

A small brewery wants $400,000 to expand. It applies to a funding portal, which reviews the company and publishes its offering page. The brewery sets a target and a closing date. Investors read the disclosures, ask questions in the platform’s forum and commit amounts. When the campaign reaches its target, the funds are released and the investors receive their securities, which they generally must hold for a year. If the brewery had fallen short of its target, investors would have been refunded. The figures are hypothetical.

Common misconceptions

• “Crowdfunding means no regulation.” Investment crowdfunding is tightly structured and run through registered intermediaries.
• “A platform vets the company’s success.” Gatekeeper duties are about compliance and disclosure. They do not predict returns.
• “I can sell whenever I want.” Resale is generally restricted for one year.
• “Reward crowdfunding gives me equity.” It does not. Backers receive a product or thank-you, not a security.

FAQ

Do I need to be an accredited investor to invest through a crowdfunding portal?

No. Reg CF is open to the general public, but non-accredited investors face limits on how much they can invest in a 12-month period. Check the SEC’s investor guidance for how the limit is calculated.

What is the maximum a company can raise under Reg CF?

According to the SEC, up to $5 million in a 12-month period.

Is a funding portal the same as a broker-dealer?

No. Both can act as Reg CF intermediaries, but a funding portal is a separate category that registers with the SEC and joins FINRA as a funding portal member.

Can I sell my crowdfunded shares?

Generally not for one year, per the SEC, apart from limited exceptions in the rules.

How do I check whether a platform is registered?

Search the SEC’s EDGAR filings and FINRA’s funding portal listings. FINRA’s website describes the registration and membership process.

Is this investment advice?

No. This guide is general education. Review the offering documents and consult a qualified professional before investing.