3 Online Securities Intermediaries for Accredited Investors

From Bulletin Boards to Broker-Dealers, Accredited Investors Have Options for Finding Deals Online

The market for online alternative investments has been growing steadily over the past few years. Under Rule 506(c) of Regulation D, companies can now solicit accredited investors for private placements, which widens the potential investor pool. As a result, online securities intermediaries have become more popular.

Types of Online Securities Intermediaries

There are three ways in which a company can utilize Rule 506(c) to market its securities to accredited investors:

• On its own
• A passive bulletin board
• A broker-dealer

As an accredited investor, it is essential to know what distinguishes each method and type of platform and what to watch out for when considering an online alternative investment. While the risk of fraud or business failure is always present, the means by which an offering is conducted creates its own risks as well.

For example, failing to follow federal and state laws on offerings may allow investors to rescind. So, even if you, the investor, are happy with the status of your investment, another investor may decide to demand the return of their principal. This could potentially lead to insufficient capital for the company to continue operations. This is a risk that is not typically disclosed prior to investing.

The Company Going It Alone

Under Rule 506(c), a company may advertise for investors. It can use its own website or a site made for the offering. The offering has no securities intermediary; rather the company is available to investors directly. Since the adoption of Rule 506(c) by the Securities and Exchange Commission (SEC), a handful of technology service providers have created integrated payment processes to facilitate online investment from the company’s website.

Investors benefit because no third party is collecting fees on the investment. Instead, all of the funds go to the company (minus any processing, escrow costs, etc.).

The disadvantage is that no third-party has reviewed the deal to substantiate the statements and assertions by the company or confirm that the investment is legally valid and binding. Additionally, the company is taking it entirely upon itself to ensure compliance with the exemption from securities registration with the SEC. Failure to comply with its obligations may result in violations of state or federal securities laws that may make it more difficult for the company to raise funds in the future if additional capital is necessary or could create an obligation to rescind any investments.

Passive Bulletin Boards

Passive bulletin boards are third-parties that assist in the sale of securities by hosting the company’s offering and providing technology-related services. Still, they do not sell on behalf of the company. Bulletin boards typically do collect transaction fees and fixed fees for the company’s use of the platform to market its offering.

One benefit of bulletin boards is that investors can review and compare several available offerings all in one place. Bulletin boards may also do some of their own marketing to bring deals to investors’ attention.

However, bulletin boards are constrained in their actions in order to avoid broker registration requirements. Unlike broker-dealers, bulletin boards cannot do the following:

• Provide investing advice or recommendations
• Find investors for the company issuing securities
• Compensate its employees or agents for solicitation or sale of securities
• Hold, manage, or handle an investor’s funds or securities

Why does this matter for investors? Under some state laws, investors who invest in a company that has used an unregistered broker-dealer may have a private right of rescission, potentially leading the company to face an obligation to return investment capital that it received (and may have already spent).

Passive bulletin boards also have no obligation to undertake any due diligence review of the issuer. They may be incentivized not to in order to avoid undertaking activities that would indicate the bulletin board is operating as an unregistered broker. For investors, this means that it is essential to ensure they have received all the information they require to make an informed investment decision.

Broker-Dealer Platforms

The third way for companies to reach investors is via platforms backed by registered broker-dealers. Broker-dealer platforms have a number of obligations that work to the benefit of investors. However, this is not without cost, and brokers do take significant fees, often in the form of a fixed posting fee and percentage commissions.

Brokered platforms must provide ‘suitable’ investment opportunities to their investors. The broker must do thorough due diligence on the offering. They must reveal any problems that could jeopardize the investment.

Broker-dealer platforms can vet deals and help structure offerings. This assures investors that corporate rules are followed. It also confirms the terms reflect the company’s value. For instance, a typical transaction type for broker-dealer platforms is a company with a lead investor in place that has already negotiated the terms of the deal. Still, the company is seeking to raise capital in addition to that being invested by the lead investor.

With broker-dealer platforms, accredited investors also have a greater amount of publicly available information about the management and prior activities of broker-dealers through FINRA’s BrokerCheck service. As an investor, you can review the credentials of the investment professionals in the offering.

Broker-dealer platforms fall under equity crowdfunding. But, they are not the same as funding portals and have different requirements.

Do Your Due Diligence

In any scenario, for accredited investors, it is essential to think critically and determine if you have enough information to make an informed investment decision and to consult a financial advisor.

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can listen to at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Digital Assets as Collateral: UCC Article 12
2. Data Privacy Compliance
3. Advertising Aces: Maximizing Reach and ROI

This is an updated version of an article originally published on October 26, 2018, and updated on February 25, 2021. This article was most recently updated by the Financial Poise Editors.] 

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