This is a continuation in my series of “Portals Ask” articles to address some of the most common issues that portals bring up in conversations in the office, at conferences, and in the media. The topic of this article is especially pertinent given many player’s deep experience in technology, real estate, consumer goods and other sectors, but lack of expertise in securities regulations.

This is not saying that broker-dealers aren’t great and don’t serve an important role in the financial system. They are, and they do. Heck, we own one. But we aren’t a portal. And the question at hand is whether or not a portal needs to be a BD (broker-dealer).

Do you need to be a broker-dealer? No, probably not. That may be appropriate or it may, in fact, be the absolute WORST thing for your business.

Do you need to be a branch office of a broker dealer? No, probably not. Just as above, it may be the wrong model for your portal.

Do you need your deals to be controlled (“underwritten” in securities lingo) by a broker-dealer? No, definitely not.

And yes, I realize I used the word “probably” in the first two statements and “definitely” in the third. Let’s talk about these.

There are three main types of portals helping issuers sell securities pursuant to 506(b) and 506(c) (aka “Title II of the JOBS Act”) exemptions to Regulation D of the Securities Act of 1933:

  • Broker-dealer portals
  • Investment adviser portals
  • Ad/listing portals

Which one are you? Well that depends upon your business model.

Broker-dealer portals can charge commissions based upon the amount and/or success of the offering. They can also provide investment advice to people and make specific recommendations (not to be confused with “general solicitation”, which anyone can do in a 506(c) offering whether registered or not). BD’s typically charge between 8% – 11% of an offering to cover costs associated with FINRA compliance, due diligence, sales commissions, etc. So if you want to charge, for example, a 10% commission on a $1M offering then you need to either be a FINRA member firm or a branch office of one. Starting (or buying) a BD isn’t cheap, around $75,000 for fees, legal, accounting and consulting and another $100,000 annually in CCO, FinOp, audit, CRD and other costs plus an additional $20,000 or more in annual state registration fees. So most BD-portals start out as branch offices of firms who specialize in branch-office business models.

Investment-adviser portals typically operate on a “2/20” model – meaning a 2% annual management fee on the assets resulting from the funds raised in the offering and an upside profit-share of 20% in the profits of the business/investment (referred to in securities lingo as “carried interest” – it’s called that as it’s your interest in the success of the venture so don’t confuse it with interest-rate or a commission on the deal). These portals fall under the “Investment Advisers Act” and are NOT subject to FINRA oversight (SEC and states, yes, but not FINRA). Thus, under this model it is not necessary (or advisable) to be a BD or a branch-office of one. Starting an IA-portal is generally free as you are initially exempt from federal and state registration requirements due to de minimis exemptions. Even when you do hit the threshold for state or SEC registration, the costs are miniscule compared to those associated with a broker-dealer.

Ad/Listing portals might charge a listing fee that is non-refundable as it cannot be contingent upon the success of the deal. Many issuers, especially real estate developers, may operate portals to solicit investors for their own deals, and as such don’t charge any fees at all, so they are just portals that list and advertise the offerings to prospective investors as allowed with general solicitation in 506(c) deals. These portals are not subject to any specific regulatory memberships or oversight, though of course the securities themselves still have to comply with the requirements of the Securities Act of 1933 (’33 Act), and the sale of those securities has to comply with state laws regarding securities dealers. Under this model it is not necessary (or advisable) to be a BD or a branch-office of one.

Why not just go ahead and operate as a broker-dealer even if you really don’t have to? Or have your offering(s) underwritten by a broker-dealer even though that isn’t required? Because the costs of FINRA compliance are debilitating to your portal and to the offerings on it. Here’s a chart of the differences.

Ad/Listing Investment Adviser Broker-Dealer
Offering doc’s/PPM must be in compliance with disclosure requirements of ’33 Act Yes Yes Yes
AML req’d on issuer and associated persons Yes Yes Yes
AML required on investors Yes Yes Yes
Ability to advertise the portal and 506(c) offerings however you want Yes Yes No
Advertisements subject to pre-review and compliance with FINRA specific guidelines No No Yes
Ability to send email blasts to any lists, at any time Yes Yes No
Email (all, including personal when using your company @address) subject to storage and review by compliance personnel and regulators No No Yes
Can help an issuer structure a deal Yes Yes Yes
             => But doing so requires a securities        .                 license No No Yes
Can talk to investors about the deal, including informing them and answering questions Yes Yes Yes
             => But doing so requires multiple                 .              securities licenses No No Yes
Can advertise the deal to any person or group Yes Yes Yes
Can recommend the deal to someone as “an appropriate investment for them individually” No No Yes
Who owns the investor list Portal Portal BD
Ability to produce videos which artfully pitch the offering and/or products and services Yes Yes No
Videos and supporting materials subject to compliance with FINRA specific guidelines No No Yes
Typical costs:
Escrow $250 $250 $250
PPM Review by lawyer Varies Varies Varies
AML  (issuer / each investor) $30 / $2 $30 / $2 $30 / $2
Due Diligence Varies Varies 1%+ of offering
State blue-sky clearance <1% <1% n/a
Selling (rep) 0% 0% 8%+


But don’t offerings have to be under the control of a broker-dealer? No. In fact, that vast majority of offerings conducted under Regulation D of Rule 506 are done directly by issuers…nearly $1 trillion a year worth. Issuers/portals usually only involve a broker-dealer if/when they can’t sell the offering themselves and need help from a broker-dealer’s sales reps. However, even then the offering itself does NOT have to be underwritten in order for a broker-dealer to help sell it. This is very common as brokers have historically sold non-underwritten securities of private companies in every industry, including real estate, oil & gas, consumer products, technology, and even Hollywood movies. The issuer prepares all the offering documents and then sends them to broker-dealers who are interested in selling (and earning commission on) the deal to their investors. The BD’s CCO (Chief Compliance Officer) reviews the offering documents and conducts whatever due diligence he/she feels is appropriate for their firm and then allows the firm’s reps to sell it – all without “underwriting” the deal. These deals are “issuer-direct” and BD’s can help sell some of it (and get paid for what they sell), and the issuer/portal is also free to sell directly to investors without involving a BD.

So when does an offering need to be underwritten? When an issuer/portal has no clue about how to structure the deal or prepare the offering documents and needs help getting it sold by registered securities reps. A broker-dealer who controls all aspects of an offering is “underwriting” it. Of course an issuer/portal can also just do it themselves, or use the services an of attorney, a business consultant, or someone else, and thus avoid BD underwriting.

So why would it be the “worst thing” you can do as a portal?
For IA-portals and Ad/Listing portals…

  • First, you will subject yourself to hassles and business friction which are absolutely not required. Your operating costs will be substantially higher. Your video and marketing materials may get watered down to the point where they don’t present your portal and your deals the way you’d like. You may miss marketing, media and conference opportunities because the process of advance-reviewing materials takes too long. You may get in trouble for saying something that, although isn’t wrong from an SEC “general solicitation” viewpoint, is not appropriate for a FINRA member. You may not enjoy having all your company’s emails being stored and reviewed by third-parties.
  • Second, there is a chance that FINRA will consider the fees your portal charges to be part of the offering compensation and possibly in violation of the amount and type of fees they allow. This could result in you having to give money back to investors, being fined, or worse.
  • Third, it will slow you down. Portal operators are almost always entrepreneurs and small business owners who typically move very quickly – they may sit at a computer and knock out their PPM (often using a template from other offerings), and then have an attorney review it and make whatever tweaks are needed. They are ready to go. But BD’s typically move very cautiously, they have to be more concerned about compliance with FINRA’s rules (in addition to the SEC’s) than in moving fast to get a deal funded. So the compliance and legal departments at a BD will often bottleneck offerings, and may decline them for reasons which the portal (and issuer) doesn’t agree with…to which there is no recourse.

Can we really do a compliant offering without being a BD, and without a BD overseeing and controlling the process? Yes, absolutely. In fact, as I’ve noted above, that is how the vast majority of private offerings are done. You need to comply with the disclosure and other requirements of the ’33 Act, which your attorney and business advisers can help you with. You need to have your investor’s funds held in escrow, which we (and others) will do for you. You need to run AML on your issuers and investors, which is inexpensive and straightforward. You need to ensure you are confirming your investor’s accredited status, which is something you can do internally or, for better liability protection and efficiency, outsource to a firm like VerifyInvestor. And you need to ensure the securities bought by investors are compliant with the blue-sky dealer laws in every state the investors reside, which we (and others) do for you inexpensively. This enables you to conduct “issuer-direct” offerings.

All without being a BD, and all without having your deal underwritten by one.

So do you need to be a broker-dealer (or a branch office of one) to operate your 506(b) or 506(c) portal? No, absolutely not. You can, if that’s your business model, but you don’t have to. And portals who are operating on Investment Adviser or Ad/Listing portal models need to stay far away from the hassles associated with unnecessary regulatory requirements and oversight.


Legal Disclaimer:
These materials are my personal opinions and for informational purposes only and not for the purpose of providing legal or tax advice. You should contact your attorney or tax professionals to obtain advice with respect to any particular issue or problem.