FINRA (The Financial Industry Regulatory Authority) the private American corporation that acts as a self-regulatory organization regulating member brokerage firms and exchange markets, this week announced that two crowdfunding investment sites have been hit with fines.
The two FINRA-registered portals Wefunder and StartEngine were hit with a combined $1.75 million in fines in two separate matters investigated by FINRA. Wefunder was hardest with a fine of $1.4 million with $350,000 for StartEngine.
In the Wefunder case, FINRA found that between 2016 and 2021, across 39 separate offerings, Wefunder raised around $20 million more than permitted under crowdfunding raise limits. This was achieved by diverting the excess funds raised in the crowdfunding offering to a subsequent offering conducted under a different exemption from registration. FINRA concluded that by doing so, Wefunder exceeded the scope of its permitted activities as a funding portal.
FINRA also found that Wefunder failed to promptly direct the transmission of funds to issuers or investors as required; 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; included misleading communications on its funding portal website; and, failed, in multiple respects, to maintain a reasonable supervisory system to supervise its business, including, for example, its process for tracking investments. Wefunder itself acknowledged as late as 2021 that its processes were flawed, as confirmed in an internal email exchange FINRA had seen.
As part of the settlement with Wefunder, the portal will be required to retain an independent consultant to make recommendations to improve its systems and procedures.
In the StartEngine case, FINRA found that at different times from November 2016 through to January 2018, StartEngine included issuer communications on its funding portal site that it knew or had reason to know were false or misleading; posted its own inaccurate counts of the number of investors in the offerings on its portal, and failed to reasonably supervise potentially misleading issuer-prepared content.
Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement said:
“Funding portals perform an important gatekeeping role for securities that are offered to investors under Regulation CF, the crowdfunding exemption from securities registration,”
“Today’s actions highlight FINRA’s vigilance over this developing area of securities regulation and our unrelenting focus on investor protection.”
