s that are essentially deemed “sophisticated” by their nature, business, or composition and able to fend for themselves.
Donative crowdfunding and rewards-based crowdfunding generally are not regulated, though may be subject to a host of other issues, including consumer protection laws, requirements in order to take tax deductions, state sweepstakes laws etc. In addition, it often is not clear when a reward might be deemed a security. Under the Howey test, an instrument or arrangement may be deemed an investment contract that is a security if the arrangement or instrument involves an investment of money into a “common enterprise” with an expectation of profits from the efforts of others. The SEC has used this test to find that, in some instances, the promise of a reward is indeed an investment contract that is a security, the offering and sale of which must be registered or exempt from registration, particularly if the reward comes in the form of a digital asset.
The attitude towards crowdlending is not as clear. While non-bank lending is largely unregulated, peer-to-peer lending generally has also been deemed an offering and sale of securities. Under the Reves test, courts look at (1) motivations that would prompt a reasonable seller and buyer to enter in the transaction; (2) plan of distribution of the instrument; (3) reasonable expectations of the investing public; (4) existence of another regulatory scheme significantly reduces the risk of the instrument, thereby rendering application of the Securities Act unnecessary. Thus, most peer-to-peer lending platforms have been required to register with the SEC or operate under exemptions from registration.
Legal affairs
Obligations and requirements to provide crowdfunding, crowdinvesting and crowdlending platforms described above
Regulation CF Crowdfunding Platforms:
Regulation CF crowdfunding platforms must either qualify under Regulation CF or register as broker-dealers. Crowdfunding platforms must be approved by the SEC and have issuer due diligence requirements, must conduct background checks, must deliver educational materials to investors, must implement written policies and procedures and privacy policies, and have specific requirements as to how they can compensate employees and have restrictions on the ability to maintain investor funds and custody securities. Certain other activities of crowdfunding intermediaries are also prohibited.
Registered Broker-Dealers Operating Crowdfunding Platforms:
Broker-dealers who are crowdfunding intermediaries do not need to have additional registrations, but they do need to have FINRA approval to conduct crowdfunding activities. See “Asset and portfolio management” above for additional information on the requirements applicable to broker-dealers. They also need to provide investors with educational materials, make issuer information available regularly and perform diligence on the issuer, among other things. Many platforms that enable crowdfunding via Rule 506(c) or Regulation A+ are also operated by registered broker-dealers.
Technology Service Providers Operating Platforms:
It is possible that a platform can be operated by an unregulated service provider if all the regulated activities are performed by regulated third parties. In addition, there is an exception from registration as a broker-dealer for certain Rule 506(c) crowdfunding platforms, as long as certain restrictions are followed.
Crowdlending Platforms:
Nonbank lending is largely unregulated in the United States, but peer-to-peer loans usually are deemed securities, subjecting crowdlending platforms to all the same regulations as other platforms for the offer or sale of securities.