Blog: FINRA fines two funding portals for crowdfunding violations – Financial Regulation News – Financial Regulation News

The Financial Industry Regulatory Authority (FINRA) has fined two funding portals a combined $1.75 million for failing to comply with securities laws and rules related to crowdfunding.

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One of the companies, Wefunder, was fined $1.4 million. FINRA found that from 2016 through 2021, across 39 separate offerings, Wefunder raised approximately $20 million more than permitted under crowdfunding raise limits. FINRA officials say it did this by diverting the excess funds raised in the crowdfunding offering to a subsequent offering conducted under a different exemption from registration.

Further, FINRA found that Wefunder failed to promptly direct the transmission of funds to issuers or investors as required. In addition, FINRA said the company improperly sent emails to hundreds of thousands of investors recommending and soliciting investments being offered on its portal in violation of a rule that prohibits such solicitations. In addition, it failed to maintain a reasonable supervisory system, FINRA officials stated.

As part of the settlement, Wefunder will be required to retain an independent consultant to make recommendations to improve its systems and procedures.

The second company fined was StartEngine, which was hit with a $350,000 penalty. Through its investigation, FINRA found that between November 2016 and January 2018, StartEngine included issuer communications on its funding portal website that it knew or had reason to know were false or misleading. Further, FINRA said it failed to reasonably supervise potentially misleading issuer-prepared content.

For example, one issuer, whose product was a home robot, exaggerated the robot’s level of functionality. In a demonstration video posted on the StartEngine website, the robot was shown performing tasks such as waking sleeping family members, teaching a child piano and art, projecting a recipe onto a cutting board, patrolling a home for intruders, adjusting a thermostat and playing peek-a-boo with a child.

However, during the offering, StartEngine received information that caused it to know that these claims were exaggerated and misleading, but it failed to sufficiently correct them, FINRA officials said.

“Funding portals perform an important gatekeeping role for securities that are offered to investors under Regulation CF, the crowdfunding exemption from securities registration,” Jessica Hopper, head of FINRA’s Department of Enforcement, said. “Today’s actions highlight FINRA’s vigilance over this developing area of securities regulation and our unrelenting focus on investor protection.”

Wefunder and StartEngine both accepted and consented to the entry of FINRA’s findings without admitting or denying them.

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