Are self-hosted Reg CF Offerings legal? I think so, but FINRA might differ.
NOTE: Self-hosted offerings are not legal for funding portals. If they are legal, it’s only for broker-dealers.
What Is A Self-Hosted Offering?
We call a Reg CF offering “self-hosted” if it appears on the website of the issuer rather than the website of a funding portal or broker-dealer.
We are accustomed to seeing multiple offerings listed side-by-side on sites like WeFunder. You click one and see the details. A self-hosted offering, accessible only on the issuer’s website, has one obvious benefit for the issuer: the offering isn’t competing for attention with all the other offerings. Most investments in Reg CF come through the marketing efforts of the issuer, not the marketing efforts of the portal. Why spend money bringing investors to WeFunder’s site when some of them might invest in something else?
The flip side, of course, is that when an issuer self-hosts, its offering isn’t seen by anyone browsing the other offerings. Statistics show that very few of those browsers end up investing, but still.
The Law
Rule 100(a)(3) provides that a Reg CF offering must be “conducted exclusively through the intermediary’s platform.”
Rule 300(c)(4) defines “platform” as “a program or application accessible via the Internet or other similar electronic communication medium through which a registered broker or a registered funding portal acts as an intermediary.”
Applying the Law to Self-Hosted Offerings
When you read Rule 100(a)(3), you might say “Ah-ha! The issuer’s website isn’t the intermediary’s platform! Therefore, the self-hosted offering is illegal.”
But then read Rule 300(c)(4) carefully. It doesn’t define “platform” as a website, as you might expect. Instead, it defines “platform” as a “program or application accessible via the Internet.”
When an issuer self-hosts a Reg CF offering, it uses software provided by the broker-dealer. The software handles the investment process from beginning to end. I believe this software – a “program” – is the broker-dealer’s “platform” for purposes of these rules. Hence, I think the offering satisfies Rule 100(a)(3) and is legal.
The history of the regulations is also on our side. Originally, the regulations (in Rule 100(d)) defined “platform” as “an Internet website or other similar electronic medium.” That language might have inhibited self-hosted offerings. But the rule was changed to read as it does today in Rule 300(c)(4), talking about “programs or applications.”
The Policy Also Lines Up
Why aren’t funding portals allowed to provide self-hosting? The answer is in Rule 402, which prohibits funding portals from “highlighting” any individual issuer, except by using criteria “reasonably designed to highlight a broad selection of issuers.” By definition, a self-hosted offering highlights only one issuer.
Rule 402 doesn’t apply to broker-dealers. Even if it listed three dozen Reg CF offerings on its own website, a broker-dealer could highlight as many or as few as it liked. If it may highlight a single issuer on its own website, there’s no reason why it shouldn’t be allowed to allow self-hosting by issuers.
FINRA Begs to Disagree
FINRA issued the following FAQ:
Q3. Is it permissible for an issuer to conduct a Regulation Crowdfunding offering on its own website? What if the issuer’s website says that my firm is the intermediary for the offering?
A3. No. An issuer may not conduct a Regulation Crowdfunding offering on its own website. As discussed above, a transaction involving the offer or sale of securities under Regulation Crowdfunding must be conducted exclusively through the platform of a single intermediary. The platform must display in such manner that it is clear to viewers and users that the platform is that of the intermediary. Posting a statement on the issuer’s website that your firm is the intermediary for the offering would not suffice to make this activity consistent with Regulation Crowdfunding.
In my opinion, FINRA is ignoring the definition of “platform” in Rule 300(c)(4). FINRA says, “[A] transaction involving the offer or sale of securities under Regulation Crowdfunding must be conducted exclusively through the platform of a single intermediary,” as if that statement answered the question. But if “platform” just means software, there should be no problem.
FINRA also says, “The platform must display in such manner that it is clear to viewers and users that the platform is that of the intermediary.” The regulations say no such thing. But if the software is branded with the broker-dealer’s name and logo, that might be good enough anyway.
Does it Matter?
I would like to see statistics demonstrating whether self-hosted offerings are more or less successful. To be meaningful, these statistics would have to account for differences in the marketing spend. My sense is that we wouldn’t see much difference, but that’s just a guess.
Questions? Let me know.
Markley S. Roderick
Lex Nova Law
10 East Stow Road, Suite 250, Marlton, NJ 08053
P: 856.382.8402 | E: mroderick@lexnovalaw.com
This is 100% lawful and complies with the rules when implemented using DNS with SSL proxy termination — in lay persons terms the web address resolves on the funding portals infrastructure as it does with Silicon Prairie clients. All transaction accounting and the funds flow through a “maintained” bank account.
I will even argue that the use of a word-press plugin would STILL be valid even if it was NOT on the portals infrastructure but instead just used API calls back where again, all accounting is still monitored and maintained.
So when you look at the footer of an offering like https://invest.above.space and the actual layout of the system you’ll see it is EXACTLY the same engine serving up https://invest.sphi.io
Lastly, FINRA is NOT the government and issuers have ZERO obligation to respond to their inquiries. All they can do is try and weaponize their attention against the funding portals who can tell them to cry to the SEC.
Regulation Crowdfunding is a “notice to file” offering — there is no review or approval and I doubt the SEC is going to spend one second on this when we now have nearly a decade of precedence on the books and a really high bar for FINRA to demonstrate that there was any investor harm.