Why I love Crowdfunding Portals

I love regulated investment crowdfunding and the portals that participate in the space. I’ve got gripes and complaints, but overall, I’m their biggest fan. They are fundamentally essential to the ongoing success of the industry—and its future growth.

Today, I’d like to enumerate some of my favorite things about portals operating under Regulation Crowdfunding:

9 Things I Love About Portals

1. Pre-Screening Investments: We all rely on portals to screen the offerings they host. They all use different criteria, but they are all required to exclude companies associated with “bad actors”—people who have been in trouble with the SEC in the past.

2. Regulatory Compliance: Having run a FINRA-member, SEC-registered broker-dealer, I know how hard it is to comply with the regulations. That is a big reason I don’t run a portal today! I’m grateful that they have made the effort to comply with the rules. These sometimes impose on us minor inconveniences, but the net effect is a safe and functional market.

3. Simplifying Small Investments: At an earlier point in my life, I was in a position to regularly consider and actually make a few old-fashioned angel investments. In those days, the process of investing was so much more cumbersome and riskier—without intermediaries pre-screening and consistently applying disclosure requirements. In the old days, a $2,500 investment was tiny! Recently, I made an investment of $5 just to see if I could. It was completely successful, quickly paid off entirely without one penny of fees to me and modest fees to the issuer.

4. Low Upfront Fees for Founders: Many portals charge no upfront fees at all. None. Those that do typically charge small fees relative to the target raise. The bulk of the fees are collected from the proceeds—when founders, by definition, have money. For small raises, the total fees could be lower than the fees charged by an attorney to prepare documents for an offering, but provide much more value.

5. Assortment of Options: Every portal I visit features a portfolio of investment options for me—and you—every single day. When I’m looking for a place to invest, I can always find an appealing opportunity.

6. Unique Personalities: Each portal has a personality. I confess that I like some more than others—as I like some people more than others (sorry). Those personalities are vital for a thriving industry. Not every founder would be well served to raise on SMBX, one of my favorites, any more than every investor wants to back those deals. Everyone is drawn to a roster of favorites. Isn’t that wonderful!

7. Supporting Founders: While all portals provide support to entrepreneurs, I love seeing the small portals often investing the time and effort to guide them at the earliest stages of onboarding an offering, helping them in countless ways to succeed. I’ll share my personal experience below. Keep reading!

8. Focus on Impact: Some portals avoid any mention of their social impact, choosing to focus on advertising the economics of the investments, while most embrace the difference they make in the world. But even those that seem to hide their social impact, support for diverse founders and the difference they make in communities do those things, just quietly. Others embrace and celebrate their impact, giving us a clear reminder that we, as investors, make a difference, too.

9. Ease of Due Diligence: Commensurate with small investments, crowdfunding portals—and the rules that govern them—make conducting due diligence easy. The required disclosures, Q&A function and updates create a forum for learning quickly, including indications of who is investing and why.

Should Small Offerings Be Exempt from Securities Regulations?

Some are arguing that eliminating the requirement for the smallest issuers—perhaps those raising up to $500,000—to use FINRA-member portals would be better for small businesses. The idea genuinely offends me. I believe it would hurt the companies we most want to help. Here’s how:

1. Lack of Regulation=Lack of Marketplace: Without a regulated marketplace, there is no real marketplace. Today, when I am approached by an issuer for an investment outside of Reg CF, I apply tenfold the scrutiny. I simply don’t have time for it. Without a portal requirement, small issuers won’t choose to use portals and will more typically fail in their raises.

2. No Portal—No Help: If there is no portal expecting a fee at the backend, who is going to provide the free help and coaching upfront? No one! No one can do that. Lawyers can’t. Accountants can’t. By law, they can’t make fees contingent on a securities offering.

3. Lawyers Can’t Replace Portals: Some envision a world where lawyers provide wise and sage counsel to help small businesses create unique, customized solutions for raising capital in a free-for-all marketplace, protecting both investors and entrepreneurs. Get real! Small businesses and unfunded entrepreneurs will download templates, copy friends and use AI to get “legal advice.” No one will be guiding them. It will become difficult, if not impossible, for investors to discern between a great offering and one that merely copied the documents of a great offering.

4. Some of the Best Portals Wouldn’t Survive: In a world where portals aren’t required and few if any securities laws apply, the portals specializing in smaller offerings simply won’t survive. It includes some of the busiest and most promising portals in the marketplace.

In this marketless “marketplace,” the small businesses we hope to help will be the biggest losers.

Changes That Will Improve Rather Than Destroy the Marketplace

Could we ease the regulatory burden on small issuers? Yes! In fact, I would argue that we must. The Crowdfunding Professional Association has proposed a roster of 18 changes that I’ve previously written about. Implementing these changes will reduce costs for issuers and improve the marketplace for investors—and portals. Everyone wins. A few key changes:

1. Ease Accounting Burden: Today, even the smallest issuers are required to provide certified GAAP financial statements. The market would function just fine using tax returns instead, allowing issuers the option to provide GAAP financials instead. Raising the threshold for financial reviews from raises over $124,000 to $350,000 (or even $500,000) is perfectly reasonable. This radically reduces the cost of upfront costs of a raise.

2. Raise Limit: The $5 million limit on raises under Reg CF limits the market’s potential. I would love to see an even wider assortment of offerings to choose from. Higher limits would enable that.

3. Simplify Rules: There are a variety of rules, especially the formula for how much “unaccredited” (everyday) investors can invest and the rules for what can be said about an offering are overly—maybe absurdly—complex. It is also important to apply and enforce rules equitably across portals. I routinely hear that portal operators see other portals “getting away” with doing things they’ve been prevented from doing.

4. Tax Incentive: The CfPA is lobbying for a tax credit to incentivize investments in Reg CF offerings. It could dramatically expand investor interest and ease the challenge of raising capital.

Clearer, easier rules with an added investor incentive will facilitate a rapid expansion in the marketplace, to the benefit of small businesses and small investors alike.

My Story with Crowdfund Main Street

A few years, I conducted a successful small raise with Crowdfund Main Street, a portal that is no longer operating. I am grateful to Michelle Thimesch, the founder and CEO, for her support. She guided me through every step and made my offering successful.

Ultimately, it is my sense that Crowdfund Main Street found the burden of complying with FINRA regulations too expensive to continue operating. I had a similar experience with my FINRA-member investment banking firm years earlier. FINRA and, to a lesser extent, the SEC, see small firms as riskier than big ones.

My firm was essentially forced out of business by the regulators in 2007 in an organized effort to purge the market of small broker-dealers because they posed a systemic risk. Those with even a single gray hair will recognize the irony. In 2008, the market unraveled and very nearly collapsed entirely because of what the largest firms were doing. Bear Stearns failed and was acquired by JPMorgan. Lehman Brothers failed and evaporated in bankruptcy. Millions lost their homes. Millions lost their jobs, not because of small firms, but because of poorly measured risks taken by the largest ones.

FINRA and the SEC should be more accommodating and supportive of small firms than they are. The value they bring to the marketplace far exceeds the risk they bring.

Over the past nine years, we have built a fantastic foundation for the future. Let’s strengthen and support it for the sake of all the social entrepreneurs, diverse founders and community builders who make our economy strong and our world better.