FINRA Issues “F” for Fraud to Equity Crowdfund Portal UFP-Here’s Why..

December 28, 2016

On November 2, 2016, FINRA, the self-regulatory agency that governs U.S. broker-dealers terminated the FINRA registration for, aka UFP, LLC (“UFP”), making UFP the first equity crowdfund portal to be expelled from FINRA.   UFP’s  online funding portal,, acted as an intermediary in debt and equity crowdfunding offerings conducted in reliance on SEC Regulation Crowdfunding rules.  FINRA’s investigation into UFP alleged that from May through September 2016, UFP violated various SEC Regulation Crowdfunding rules and FINRA Funding Portal Rules.

The matter marks both early and decisive action by FINRA against a registered funding portal operating under Regulation Crowdfunding.  It establishes that FINRA takes seriously its new regulatory beat and that the gatekeeper function that portals are required to fulfill must be satisfied.

As a result of FINRA’s investigation, UFP pulled its website and submitted a Letter of Acceptance, Waiver and Consent (the “AWC”) in order to settle these alleged rule violations with FINRA.  The AWC is available at:

Since that edict, Scott Andersen, a former enforcement director for FINRA, the NYSE and prosecutor for the NY Attorney General specializing in securities matters has opined as to the do’s and do not’s when it comes to operating an equity crowdfund platform and relevant warnings to those using equity crowdfund platforms to raise money. Below is the extract to a 28 December opinion piece published by Crowdfund Insider. Andersen’s insight is part/parcel to the criteria that evaluates in advance of listing any/all equity crowdfund portal via the global search directory of crowfund sites.

Here are key takeaways from FINRA’s action against UFP:

  • Funding portals, like broker-dealers, are gatekeepers.  The FINRA action was based on the determination that UFP had no basis to believe that its issuers were in compliance with Regulation Crowdfunding.  The rules require that a portal must have a reasonable basis for believing that an issuer seeking to offer or sell its shares on its platform meet the requirements of Regulation Crowdfunding.  In fact, a portal is required to deny use of its platform where it reasonably believes that an offering presents a potential for fraud.  While a portal may generally rely on an issuer’s representations concerning compliance, this is not true in instances where the portal has any reason to doubt the issuer’s representations.
  • UFP hosted suspicious issuers and offerings.  Many crowdfunding portals are understandably concerned that the initial action by FINRA against a funding portal resulted in the highest sanction — an expulsion.  UFP was in many ways an anomaly, however.  How often do you have sixteen issuers who omit the same specific disclosures required by Regulation Crowdfunding?  Two of the issuers had identical officers and directors, but vastly different business plans.  Thirteen of the issuers had identical valuations, price per share, funding targets, and no assets or history of operations before May 2016, yet each issuer was valued at $5 million.
  • Overly-optimistic financial forecasts spell trouble.  FINRA advertising rules have always limited its members use of forecasts and profit projections when selling securities.  We continue to see in the JOBS Act space that capital raises under Title II and IV on platforms with no broker-dealer affiliation often use generous profit projection forecasts.  Crowdfunding portals like broker-dealers, however, will be held to a higher standard, and thus the marketing dichotomy continues between broker-dealer and portal related offerings and those of platforms who have no FINRA affiliation.
  • Are Portals responsible for an issuer’s valuation? FINRA was clear in its criticism of UFP that several issuers on its site held wholly unsupported and improbably identical $5 million valuations.  The regulatory violation by FINRA was structured as an untrue or misleading statement, and FINRA’s case was relatively easy considering the identical valuations across multiple issuers on UFP’s site.  A question remains how FINRA will view a portal’s responsibility for an issuer valuation on a one-off basis, looking at one issuer on a site specifically.
  • Unreasonable supervision.  Like the broker-dealer world, where FINRA finds violations of federal securities laws or its rules, a portal will also be hit with a failure to reasonably supervise violation.  This can be challenging for some new portals whose principals have no broker-dealer experience, and FINRA does not yet require any series license to confirm a principal’s familiarity with the rules in advance of allowing them to operate an equity crowdfund portal.

One more critical take-away: Offering Documents used to raise money from investors are encouraged to engage experts who understand the rules of the roads and who comply with and conform to the rules set forth by the respective regulatory regime(s) that govern Issuers who are soliciting investments from in specific geographic regions and Issuers domiciled within the region in which an offering is promoted.

To read the entire article via Crowdfund Insider, click hereFINRA Issues “F” for Fraud to Equity Crowdfund Portal UFP-Here’s Why..