Dear Startup Investor,
The world of crowdfunding stood to attention last week when news broke of the $1.75 million fine the Financial Industry Regulatory Authority, a.k.a. FINRA, levied against Wefunder and StartEngine.
These are the two largest crowdfunding platforms in the startup space. In fact, in April, they hosted six of the top 10 highest-volume Reg CF (Regulation Crowdfunding) campaigns.
Not only that, the more than $350 million raised through campaigns on Wefunder last month was more than all the other crowdfunding platforms not named StartEngine raised together.
Well, one of the issues – and a big reason Wefunder bore $1.4 million of the total fine – is the money funnel didn’t quite shut off when it was supposed to…
According to FINRA, across 39 filings between 2016 and 2021, Wefunder improperly accepted investments beyond the campaign maximums and, rather than return the funds to investors upon determining the waitlist cutoff, held the excess funds in a separate escrow account. The prompt disbursement of funds to either the issuer or investor is required for any crowdfunding platform.
(Anthony P., I hope this answers your question after Buck’s Saturday article.)
The platform didn’t pocket investments for its personal gain.
Instead, it unilaterally redirected funds invested in oversubscribed Reg CF campaigns on their website into separate Reg D campaigns, which are reserved for accredited investors (those with gross income exceeding $200,000, or joint income exceeding $300,000, in each of the past two years).
This is outside the scope of regulations for crowdfunding platforms, and the aforementioned lack of promptness with the disbursement of funds only made matters worse.
Wefunder also used improper language in its email marketing tactics, amounting to “recommendations” of individual campaigns. This is a big no-no for a crowdfunding platform. It is, however, our bread and butter, which we are permitted to do under the publishers’ exception.
Crowdfunding platforms are required to serve as informational and investment hubs only, leaving the decisions to individual investors and the recommendations to independent outlets like us.
Meanwhile, StartEngine’s $350,000 fine was for smaller, yet still significant, infractions.
According to FINRA, between 2016 and 2018, StartEngine failed to properly fact check certain claims from startups and allowed misleading information to be published on Reg CF campaign pages. In certain cases, it knowingly published misleading correspondence from issuers to potential investors.
Now, more than three years after the last instance, it’s clear StartEngine has since amended its protocols to adhere to industry standards.
And at the end of the day, despite the optics, these fines represent a line of progress for a still-nascent industry.
However, they are also a reminder to prospective angel investors, as Buck mentioned on Saturday…
These crowdfunding platforms prioritize the needs of founders and startups over investors. After all, that is how they make their money.
That’s why it’s imperative for angel investors like you to do your own due diligence. It’s up to you to equip yourself with all the information you need to make the best decision for YOU.
Our advice, here at Angels & Entrepreneurs Network and The Startup Investor,is to take claims you see on funding platforms with a grain of salt. Do your own research. Turn to trusted sources like us. And finally, draw your own conclusions.
Ultimately, we live and breathe research and due diligence in the startup space. Because that’s what it takes to succeed in these relatively new waters.
Growing pains are part of the process. Swimming blindly is not. We promise, with us, you’ll never have to.
The Research Team
P.S. Another question Saturday’s piece from Buck elicited was from Carl. He wrote, “When you say they’re regulating and protecting investors, does that also mean they’re placing limitations on investors as far as when, where, how often and how much you can invest?” Carl, FINRA’s fine is intended to protect investors against misleading and deceptive activities from organizations who have been charged with responsibly handling your investment money. There are other restrictions on angel investors aimed at preventing them from investing their life savings. But that is a conversation for another day.