The Financial Industry Regulatory Authority said it has imposed fines against two funding portals for violations of rules involving crowdfunding.
In a news release, the authority announced the action against FINRA-registered firms Wefunder and StartEngine Capital for their failures to comply with securities laws and rules designed to protect investors. Wefunder was fined $1.4 million and StartEngine Capital was hit with a $350,000 penalty.
FINRA found that in 39 separate offerings from 2016 to 2021, Wefunder raised about $20 million more than permitted under crowdfunding raise limits. This was done, officials said, by diverting the excess funds raised in the offering to another offering conducted under a different exemption from registration.
It was also determined that Wefunder had not promptly directed the transmission of funds to issuers or investors as required. In addition, FINRA said the portal improperly sent emails to hundreds of thousands of investors recommending and soliciting investments offered on its portal, violating a rule that prohibits these kinds of solicitations. Wefunder also failed to maintain a reasonable supervisory system to supervise its business, the authority said. The portal will now be required to retain an independent consultant to recommend how to improve its systems and procedures.
FINRA found that StartEngine had “included issuer communications on its funding portal website that it knew or had reason to know were false or misleading; posted its own inaccurate counts of the number of investors in the offerings on its portal; and failed to reasonably supervise potentially misleading issuer-prepared content.”
The two portals did not admit or deny the findings but accepted and consented to the settlement with FINRA.
“Funding portals perform an important gatekeeping role for securities that are offered to investors under Regulation CF, the crowdfunding exemption from securities registration,” said Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement. “Today’s actions highlight FINRA’s vigilance over this developing area of securities regulation and our unrelenting focus on investor protection.”
The actions against Wefunder and StartEngine resulted from FINRA’s ongoing examination program of funding portal members to determine whether they are complying with funding portal rules and SEC requirements.
Handling financial services disputes requires counsel with a significant understanding of the industry, the laws, rules and regulations that impact our clients and the forums in which disputes are adjudicated. At Lewitas Hyman, our attorneys’ unparalleled litigation experience comes from leveraging their industry-specific knowledge developed from working at firms such as Morgan Stanley, UBS Financial Services and EVEREN Securities, serving as outside counsel for some of the world’s largest law firms, and through prior affiliations with the SEC. For more information about our arbitration and litigation services, please contact Lewitas Hyman at (888) 655 6002 or through our online contact form.