By Mark S. Nelson, J.D.
Wefunder Portal, LLC and StartEngine Capital LLC agreed via Letters of Acceptance, Waiver, and Consent to settle charges by FINRA that both firms violated federal securities regulations and FINRA rules for crowdfunding portals. Wefunder allegedly allowed crowdfunding offerings to become oversubscribed in excess of offering limits and then shifted excess investment funds to other exempt offerings. StartEngine allegedly allowed issuers to post misleading communications on its website. Wefunder agreed to, among other things, pay a fine of $1.4 million to resolve the matter, although without admitting or denying FINRA’s allegations. StartEngine agreed to pay a $350,000 fine without admitting or denying FINRA’s allegations (Wefunder Portal, LLC, FINRA Letter of Acceptance, Waiver, and Consent No. 2021071940801, May 4, 2022; StartEngine Capital LLC, FINRA Letter of Acceptance, Waiver, and Consent No. 2017055183101, May 4, 2022).
“Funding portals perform an important gatekeeping role for securities that are offered to investors under Regulation CF, the crowdfunding exemption from securities registration,” said Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement, via press release. “Today’s actions highlight FINRA’s vigilance over this developing area of securities regulation and our unrelenting focus on investor protection.”
Wefunder. The SEC’s Regulation Crowdfunding imposed offering limits on small, crowdfunded securities offerings. According to FINRA, Wefunder routinely allowed offerings on its platform to accept funds above the regulatory limit. FINRA offered as an example, one such crowdfunding offering in which Wefunder allowed the offering limit to be exceeded and then identified accredited investors who had invested in the crowdfunding offering and told those investors that their investments had been moved into another exempt offering under Regulation D. Wefunder then transferred the excess funds that were held in a crowdfunding escrow account to a Regulation D account in the name of Wefunder’s parent. FINRA said Wefunder engaged in similar conduct in a total of 39 offerings.
As a crowdfunding portal, Wefunder was subject to the requirements of Regulation Crowdfunding and FINRA’s similar rules for crowdfunding and crowdfunding portals. Specifically, FINRA alleged that Wefunder’s conduct violated FINRA Rule 200(a), which requires firms to observe high standards of commercial honor and just and equitable principles of trade.
Moreover, FINRA alleged that Wefunder failed to return funds to investors regarding cancelled or oversubscribed offerings and allowed funds to remain in dormant escrow accounts. Wefunder’s website also allegedly contained misleading communications.
Lastly, FINRA alleged that Wefunder lacked a reasonable supervisory system to monitor communications and track investments made via its platform. FINRA alleged that Wefunder’s tracking systems consisted of a labor-intensive, manual process handled primarily by one overwhelmed individual who lacked a basic understanding of finance. Said FINRA: “Wefunder realized this to be the case, as reflected in an internal email from May 2021, where one officer wrote to another that his ‘trying to do everything himself’ was failing the team.”
As a result, Wefunder agreed to be censured and pay a $1.4 million fine. Wefunder also must abide by an undertaking that requires the firm to engage an outside consultant who will review Wefunder’s compliance with federal securities regulations and FINRA rules.
StartEngine. FINRA also penalized StartEngine Capital LLC for violating rules applicable to crowdfunding portals. In addition to posting misleading investment trackers on its website and failing to supervise issuer communications, FINRA alleged that StartEngine allowed two issuers to post misleading communications.
In one instance, StartEngine allegedly allowed an issuer to post that its robot “can do just about anything” and that retail sales of the robot were imminent. That offering raised $200,000. In another instance, StartEngine allegedly allowed an issuer to post an unrealistic time frame for when the issuer’s professional basketball team would begin playing games. In both instances, FINRA alleged that SmartEngine knew or had reason to know the postings were false or misleading. StartEngine agreed to be censured and to pay a fine of $350,000.
The matters are No. 2021071940801 and 2017055183101.