Silicon Prairie has dumped its Funding Portal designation and is migrating all current offerings to its Broker-Dealer. FINRA regulates both Broker-Dealers and Funding Portals.
A Funding Portal is kind of like a broker-dealer light. This new type of intermediary was created under the JOBS Act of 2012, initially expected to allow securities crowdfunding platforms to issue securities under Reg CF as the investment crowdfunding industry emerged. This securities exemption initially allowed issuers to raise up to $1 million – an amount that doomed the industry as it was not sustainable. During the tenure of SEC Chairman Jay Clayton, the exemption was bumped up to $5 million – a more tenable amount.
At the same time, the JOBS Act also allowed Broker-Dealers to issue securities under Reg CF. In recent years, many online investment platforms have sought to be regulated as Broker-Dealers, as this would enable them to provide more services to issuers. Meanwhile, they added services catering to Reg D and Reg A+.
Silicon Prairie CEO and founder David Duccini issued a statement on LinkedIn noting their decision to exit the Funding Portal business:
“It’s official! Silicon Prairie Online is now a FORMER Funding Portal Member of FINRA as we have migrated ALL of our Regulation Crowdfunding (REG-CF) business into our Broker Dealer.
This will dramatically improve our overall service delivery as we can now simply combine REG-CF and REG-D offerings in a single contract and SLASH our regulatory compliance costs in terms of time, money, morale, and focus!
We’re certainly not the first, and we will not be the last as the rest of our contemporaries get tired of fighting for scraps while having to put up with an overzealous regulatory apparatus that loves to make busy work for itself.”
Silicon Prairie is not the first online investment platform to abandon its Funding Portal designation. Many former Funding Portals have been compelled to exit the business either due to a lack of business or regulatory transgressions.
Silicon Prairie’s decision may foreshadow a transformation of the securities crowdfunding industry. While there are dozens of FINRA-regulated Funding Portals, the sector is dominated by just a handful of platforms. At the same time, it is tough to generate a profit for platforms by focusing solely on Reg CF offerings. This has compelled many platforms to diversify into other services, including other securities exemptions. Many Reg CF offerings are paired with Reg D, making a securities sale more viable as it allows an unlimited amount of funds to be raised under Reg D while catering to Accredited Investors.
Expectations that Congress and a more amenable Securities and Exchange Commission may alter the definition of an Accredited Investor to expand access and remove current discriminatory practices under the rule may change the dynamics of online capital formation. While Reg CF is measured in the hundreds of millions annually, Reg D is measured in trillions, with the most promising early-stage firms utilizing the Reg D exemption. Still, industry insiders point to Reg CF as a viable path for smaller firms needing growth capital – especially for firms that do not anticipate becoming global tech titans or other large businesses.