Why Advisors and BrokerDealers Should Know Crowdfunding

BrokerDealer.com blog update courtesy of excerpt from InvestmentNews.com

The moment many advisers hear the term “crowdfunding,” they tune out. Crowdfunding is for the unwashed masses, for Kickstarter fans, for small-time investing neophytes. It’s not a place for real investing.

Well, advisers can continue to believe that, but that doesn’t mean their clients will. Especially given changes on tap for 2016 that will shower more investors with opportunities to “get in on the ground floor of the next big thing.”

The odds of your clients being drawn to new ventures rose markedly on Oct. 30, when the Securities and Exchange Commission passed Title III, part of the 2012 JOBS Act, which allows non-accredited investors to get into private equity through crowdfunding platforms.

Jeff Benjamin’s column quoted a securities lawyer, Doug Ellenoff, calling this move “the publicification of the private investment market.” And Mr. Benjamin cautioned InvestmentNews readers about the coming “aggressive push into the retail space” early next year, when these sites can begin taking non-accredited money.


Luckily for advisers, who hold tight to client assets and manage portfolios holistically, the buy-in for these offers will be limited. The deals themselves will not be able to raise more than $1 million in a 12-month period, and individuals will be able to contribute only between 5% and 10% of their yearly income.

But any chunk broken out of a financial plan to wager on these offers deserves attention. That’s not to say none of these ventures will be worth considering. And likely, if a client wants to support a community project, for example, there may be factors to weigh in addition to possible returns.

But in this new environment, advisers need to tell clients: “Bring anything that comes your way to us first.” Deals will sound too good to be true because that’s how marketing works. That’s fine when it comes to toothpaste or hamburgers, but decisions to spend even a few grand in retirement savings on crowdfunding offers would benefit from professional scrutiny.

And advisers will need to stay current during the evolution of this new retail-level private equity market and its investment structure…

For the full article, please click here

SEC Chairwoman: Fiduciary View-Do It Right, Not Right Away

SEC Mary Ho White

SEC Chairwoman Mary Jo White says slow pace for instituting new fiduciary mandates for brokerdealers and registered investment advisors is because “the SEC wants to avoid unintended consequences and ‘get it right.’

10 November (InvestmentNews.com)- Securities and Exchange Commission Chairwoman Mary Jo White said Tuesday that agency staff is “full-out” working on a proposal to raise standards for retail investment advice, but that it would take time to “get it right.”

BrokerDealer.com is home to the largest global database/directory of brokerdealers operating in more than 30 countries across the free world.

A primary reason for the slow pace is that the SEC wants to avoid unintended consequences, Ms. White told the audience at the Securities Industry and Financial Markets Association annual conference in Washington.

“If at the end of the day, you are depriving retail investors of reliable, reasonably priced advice, you will not have succeeded, obviously, in your purpose,” she said.

Ms. White’s comments echo those the industry makes when it criticizes the Labor Department best-interests rule for advice on retirement accounts, which is on its way toward finalization.

“It is a reminder that hopefully the DOL will reconsider [its proposal] due to the complexity of the issue,” Ira Hammerman, SIFMA executive vice president and general counsel, said in an interview. “The DOL should re-propose what they’re contemplating so that all interested parties can get one more look at what the DOL thinks the solution is.”

In the five years since the Dodd-Frank financial reform law gave the SEC authority to promulgate a rule that would require all retail investment advice to be given in the best interests of the client, the SEC has not made discernable progress.

“We will move on it as expeditiously as we can,” Ms. White said. “We must get it right and really take into account the complexities and impact. But we’re very full-out focused on it.”

In March, Ms. White told a SIFMA conference she wants the SEC to move ahead on a fiduciary rule. At Tuesday’s SIFMA meeting, she declined to give a timeline, but said crafting a proposal could be a protracted process.

“It’s not a short, quick, uncomplicated rulemaking,” she said.

In addition to a fiduciary duty rule, the SEC is working on a rule that would allow adviser examinations by third-party organizations.

In a meeting with reporters on the sidelines of the conference, Ms. White said the agency is further ahead on the exam rule than the fiduciary rule, but “it’s going to take time to do them right.”

Due in part to the timing of an SEC rule, an advocate for the DOL rule said the agency should proceed independently.

“Nothing that Chair White said today provides any justification for the DOL’s delaying or reconsidering its efforts,” said Barbara Roper, director of investor protection at the Consumer Federation of America. “They need to finalize the rule.”

For the full story from InvestmentNews Daily, please click here

SEC Passes Equity Crowdfunding Rules-A Boon For BDs?

brokerdealers crowdfunding

Will New Regs Create A Boon For BDs?  Brother, Can You Raise $1mil?

(RaiseMoney.com)–If only coincident to the Halloween Trick or Treat Holiday, it’s now official, on Friday Oct 30 the US Securities & Exchange Commission (SEC) passed new equity crowdfund regs, opening the path to what some believe will be a multi-billion dollar tidal wave of startup funding, and also, what more cautious experts believe could be an entirely new cycle of speculative investing by unsophisticated investors. The new rules approved will make it easier for start-ups to sell shares directly to the masses. Brother, can you spare $1million?

They could also be big business for a broad universe of broker-dealers, as well as handful of Los Angeles firms (among many others) that want to act as the stock exchanges where these deals will take place.

The rules, which will take effect in about six months, allow private companies to raise up to $1 million a year from small-time investors without most of the reporting and auditing required of larger firms or companies raising more money.

For the entire story from RaiseMoney.com, please click here



Here Comes MiFID Part 2-What BrokerDealers Need to Know

mifid II

MiFID II is in the batter’s box, and BrokerDealer.com provides a good primer for investment banks and broker-dealers courtesy of Traders Magazine contributor Simon Richards of Fonetic USA.

BrokerDealer.com note: Its time to deploy a new regime of voice-recording record keeping…

The investment banking beast is changing its spots. Driven by the regulators and the threat of billion dollar fines, these traditionally ponderous organizations are awake to what they need to do in order to comply with the Dodd-Frank Act and MiFID. But it is quite clear that the establishment of new regulations is not going to be a one-off occurrence. 

BrokerDealer.com provides the most comprehensive list of global brokerdealers with a database of broker-dealers in 35 countries across the world.

The recent changes to the Markets in Financial Instruments Directive — MiFID II — demonstrate that the regulations are going to change often and rapidly. Adapting to amendments to regulations is the new status quo.

The MiFID II changes are wide-ranging and will affect functions across the board from trade strategy, trade initiation, trade execution, settlement and clearing to ongoing management. Your firm’s IT and HR systems are also likely to be affected. 

One significant change is that the scope of the Transaction Reporting Obligation is being extended. Investment firms will have to keep a complete record of all services, activities and transactions in a format that can be accessed by regulators. Let’s take a look.

Phone and Ecomms: Firms must record all phone and electronic communications relating to concluded and potential transactions. The records must be stored for a minimum of five years and where requested by an authority up to seven years. Under Dodd-Frank, phone recordings are required to be kept for 12 months.

Storage: All electronic records must be stored in a medium that cannot be changed or deleted and must be available to clients on demand.

Trading: All trades, including algorithmic trading records, must be stored on an approved form with accurate, time-sequenced record of orders that were placed executed or cancelled. Firms must keep all relevant data relating to orders and transactions, whether for their own account or on behalf of clients.

The MiFID II amendments illustrate that the regulations are subject to rapid change. This means the industry needs to become more strategic. In short, tactical solutions are no longer going to cut the mustard.

To read the entire primer, please visit TradersMagazine.com


Simon Richards is CEO of Fonetic USA.

Equity Crowdfunding and BrokerDealer Rules

sec rules equity crowdfund

BrokerDealer.com curators have received many inquiries from across the industry with regard to equity crowdfunding rules and regs.  As spotlighted by industry experts at RaiseMoney.com, the portal launched by Wall Street expats, the SEC is getting ready to formally announce new rules for the multi-billion dollar crowd fund industry, and towards addressing the common questions, below is post produced by Scott Purcell, serial entrepreneur and founder and CEO of FundAmerica. Purcell keeps a highly informative blog, focusing on equity crowdfunding in the US, and we are sharing the latest post below…and remind our readers that the following is for informational purposes only. BrokerDealers or Investment Advisors who are engaged in crowdfunding initiatives should consult with their compliance officer and an attorney.

This is the single most common question I get asked. There’s a lot of misinformation about this, so let’s clear it up…

BrokerDealer.com hosts the world’s most comprehensive database of brokerdealers operating across 35 countries worldwide

Keep in mind that a “platform” is just a website. It’s NOT a business in and of itself (people often confuse a 506b/c or Reg A platform with a Title III “portal” as defined in the JOBS Act, and they are very differrent things). A platform is simply a tool for general solicitation. So you are not a platform, you are an issuer/investment adviser/listing service/broker-dealer who might have a website that lists offerings of securities, might use other websites that promote offerings of securities, might use social media to promote offerings of securities, might run newspaper ads to promote offerings of securities, might send emails to promote offerings of securities…you get the picture.

Platform Types:

There are four main types of businesses using platforms to market securities pursuant to 506-D (aka “Title II of the JOBS Act”) and Regulation A (“Title IV”):

  • Broker-dealers
  • Investment advisers
  • Ad/listing services
  • Direct Issuers

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

Broker-dealers can charge commissions based upon the amount and/or success of an offering. They can also make specific recommendations (not to be confused with “general solicitation”, which anyone can do in a 506(c) or Reg A offering whether registered or not). BD’s typically charge around 8%+ of an offering to cover costs associated with compliance, due diligence, sales commissions, etc. So if you want to charge, for example, an 8% commission on a $1M offering then you need to either be a FINRA member firm or a registered representative of one.

NOTE: only BD’s and registered representatives can receive commissions or success-based compensation. You CANNOT receive commissions as a rep and then hand those over to an unregistered person or company. This is a huge mistake we have heard many operators are making; getting someone in their firm registered so the BD can pay them, and then having them hand over those fees as income to the firm. Illegal. Games cannot be played with this (e.g. charging the rep a huge office rent) as regulators are wise to that and the results will not be pretty. So unless you intend to register every single person in your business, or to buy all or part of a broker-dealer, there is no way for you to receive any income tied to the amount or success of a securities offering.

Investment-advisers 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). This falls under the Investment Advisers Act of 1940. Thus, under this model it is not necessary (or advisable) to be a BD or a branch-office of one. Starting an IA is generally free as you are usually 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 minuscule compared to those associated with operating a broker-dealer.

Ad/Listing services might charge a listing fee that is non-refundable and/or a fixed transaction fee for processing data and/or other types of fees which are not (and cannot be) contingent upon the success of the deal. Issuers come to the platform and agree to pay the ad or listing fees (if any) for displaying their offering. The platform focuses on marketing itself and providing general solicitation services to issuers who engage them. They get no compensation in the form of commissions, fund management fees or carried interest like broker-dealers or investment advisers do. Thus, under this model it is not necessary (or advisable) to be a BD or a branch-office of one.

Interesting: investment advisers and broker-dealers can post the offerings or deals they are selling on listing services platforms. Some such platforms are even aggregating (re-displaying) offerings which are displayed on other platforms. My next article will discuss various forms of syndication.

Issuer-Direct websites (platforms) are run by businesses (e.g. real estate developers, technology incubators and others) to solicit investors for their own deals, and as such don’t charge any fees at all. They are just platforms that list and advertise the offerings to prospective investors as allowed in 506-D and Reg A offerings. These platforms 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 each of the 50 “mini-SEC’s” state laws regarding securities dealers. Under this model it is not necessary (or advisable) to be a BD or a branch-office of one (but almost always necessary to engage one to “sell” your securities to states residents).

Why not just go ahead and operate as a broker-dealer even if you really don’t have to? Because unless you’re already a broker-dealer then your expertise is likely elsewhere, it’s not what you do, and the added burden of regulatory compliance can be debilitating to your business and to the offerings your promote; and registered representatives can’t share fees with non-registered persons anyhow. So stick with what you know, and hire other firms to do what they do.

But don’t offerings displayed on platforms have to be under the control of/underwritten by a broker-dealer? No.

So, is my business model legal? Here are a few guidelines…
If operating as an investment advisor, listing service or issuer direct - do not charge fees based upon the amount or success of the offering and don’t make specific investor recommendations (as opposed to general solicitation, which is fine). Engage a broker-dealer to assist you with various federal and state compliance tasks.
If you are operating as a broker-dealer – do not pay anyone (neither individuals nor businesses) any portion of the compensation you are receiving unless they too are registered and you have specific approval to do so from your broker-dealer.
But…as always…check with your securities attorney before you do anything.