Culled—Proshare

March 1, 2017/Closing Remarks by SEC Commissioner Kara M. Stein

Good afternoon. Thank you all for contributing to this inaugural SEC-NYU dialogue on securities crowdfunding. In particular, I would like to thank each of the panelists, SEC staff in the Divisions of Economic and Risk Analysis and Corporation Finance, and the NYU Salomon Center for the Study of Financial Institutions.

Today’s program has focused on federal crowdfunding. We are now able to observe the first tentative steps investors, entrepreneurs and intermediaries have taken in navigating this new landscape. From May 16, 2016, when crowdfunding went “live” to December 31, 2016, 21 funding portals registered with the SEC and FINRA. They facilitated 163 deals involving 156 distinct issuers. Moreover, as of the end of last month, 36 reported deals raised $11.3 million. These first steps hint at how small businesses will use federal crowdfunding.

The information presented today also hints at potential challenges. Three areas I believe deserve more thought and attention include (i) funding portals’ role as gatekeepers and facilitators of capital formation; (ii) the types of securities offered to retail investors in crowdfunding deals; and (iii) market concentration.

Funding Portals’ Role

Let’s start with the role of funding portals. From May 2016 through January 2017, 27 regulation crowdfunding offers were withdrawn. Sixteen of the withdrawn offers were hosted on a single funding portal, which was expelled by FINRA and withdrew its SEC registration. In essence, the portal had failed to uphold its most basic responsibilities. Allegedly, it ignored red flags and allowed suspect offers onto its platform. These offers did not appear to meet the issuer disclosure requirements specified in Regulation Crowdfunding.[1] For months prior to its expulsion, the funding portal allowed unsuspecting investors to invest in the 16 suspect offers. This incident provides us with the opportunity to examine the important role of funding portals as gatekeepers, as well as facilitators of capital formation. Are registered portals appropriately considering the companies and offers hosted on their platforms? When portals fail to conduct appropriate diligence, it adversely impacts both the investors who may become victims of a fraudulent offer, but just as importantly, it affects subsequent offers by other issuers. “Once-bitten-twice-shy” investors may be reluctant to fund the next business seeking financing through crowdfunding. Therefore, portals that are effective at vetting issuers and offers are important as both gatekeepers and facilitators of repeat investment.

To date, there has been some discussion within the crowdfunding industry about funding portals. Some have noted that funding portals have a spotty record of diligence. Some have registered concern at what may be a race to the bottom as portals compete for offers to host.[2] First of all, is this happening? If so, how should we address this? For example, should there be minimum and uniform standards for vetting companies seeking to be hosted on a portal? Should portals be ranked, and if so, based on what criteria and by whom? What else can be done to help portals be effective for the good of the entire marketplace?