As an investor, it’s good to see FINRA being vigilant in the space. Equity Crowdfunding has the potential to revolutionize the startup investing landscape by lowering the burdens to invest. However, like any place where money is involved, it also has the potential to be ripe with scams. The optimistic in me likes to think the majority of companies on these sites are on it with good intentions, but we shall see. Don’t get me wrong, I have done extremely well in the area thus far, so I can’t complain.
However, that doesn’t mean companies can circumvent the law. This is especially true when Nicholas Tommarello, the CEO of Wefunder, was the one who helped write and push the equity crowdfunding laws through congress. This fine handed down to Wefunder is the largest in the space by a rather wide margin, and one of three to be handed down in the space thus far. The first being, under rather egregious facts, truCrowd who was basically just completely scamming people:
Despite being, in my opinion, incredibly egregious, truCrowds fine only amounted to $243,747. This is significantly less than Wefunder’s, granted Wefunders violations have been way more, over way longer, and significantly more broad.
Handed down simultaneously was a fine for StartEngine, amounting to $350,000. This is a much smaller fine that I will break down in my next article (so make sure to follow and stay tuned!). StartEngine was fined for a few raises that occurred in 2017 and 2018 mainly.
There are 5 alleged violations with *millions* of instances of breaking laws related to the crowdfunding rules. These violations include:
Exceeding Reg CF maximums, then diverting investor's funds in 39 offerings
Failing to promptly return investor's funds
Millions of emails of Wefunder offering investment advice and soliciting investments
Using the “lead investors” testimony to post misleading communications on their site
Completely failing to establish ANY supervisory procedures of its payments, banking, and investment management systems from 2016 to 2018, and several other violations for failing to implement proper procedures relating to emails, investor complaint reporting, facilitating offerings, and more.
There are several other violations within each of these categories, but all around it’s not a great look. After reading through these, it seems incredibly clear to me that the SEC and FINRA want to make sure portals are taking investor complaints incredibly seriously. The SEC fine in the case of truCrowd actually wasn’t for fraud, but for failing to follow up on investors' complaints. While the facts surrounding it are terrible, it does show that FINRA is going to be taking these laws seriously.
Exceeding Reg CF maximums and diverting investor's funds
This one is pretty bad because it’s just blatantly skirting the rules. Currently, companies are not allowed to raise more than $5 million in a rolling 12-month period under Reg CF. That limit used to be $1.07m but changed to more favorable laws in March of 2021. While $1m is not a small amount of money, it’s not hard to exceed that, and many companies do. In fact, 39 companies exceeded that from May 2016 until October 2021.
Rather than capping out the investment at that $1m, they would identify investors in that offering that qualified as accredited investors, open up a separate Reg D offering then notify the investors their investments were now being sold under Reg D. Wefunder then directed the escrow agent to transfer the funds to the Reg D offering. This happened to a total of 39 offerings.
This process violated several laws under the Securities Act and Reg CF rules. FINRA says the money should have been promptly returned to investors.
Failing to promptly transmit or return investor's funds
Losing investors' money is… not good. Along with the violations in the previous section, where the money should have been returned to investors and not directed to a different escrow account, there are other issues of not promptly returning investors' funds.