In what may be the first of many, CircleUp, a San Francisco-based crowd-funding platform that focuses on consumer products companies, has registered a broker-dealer.
The move paves the way for
CircleUp to get paid on the private placements it sells to investors.
CircleUp's broker-dealer, Fundme Securities LLC, was approved this month by the Financial Industry Regulatory Authority Inc.
The portal has been offering private placements through the investment bank WR Hambrecht + Co. LLC since April of last year, said Rory Eakin, a founder and chief operating officer of CircleUp, and has raised more than $10 million for 12 companies.
Since CircleUp couldn't get paid from those offerings, it has funded itself through money raised from outside investors.
More private deals for startups are in the works, Mr. Eakin said, although none have yet been handled by the new broker-dealer.
The Jumpstart Our Businesses Startups Act, signed into law last year, exempted from registration securities offerings of up to $1 million annually when sold to small investors through online crowd-funding portals.
The law requires portals to register with a national securities association, such as Finra, or register as a broker-dealer.
Both the Securities and Exchange Commission and Finra are working on rules to implement the crowd-funding portion of the JOBS Act. New rules could allow some type of streamlined broker-dealer for portals — an idea the crowd-funding industry has been pushing.
But portals have been frustrated by the slow pace of rule making, and going the full broker-dealer route could be the best option at this point.
“We're the first [portal] to have gone through the [broker-dealer registration] process start to finish,” Mr. Eakin said.
He expects more will do the same.
“It's the right way to go,” Mr. Eakin said. “Fundamentally, crowd-funding portals are in the business of issuing securities. … Being a B-D, and part of Finra, provides some stability and public accountability.”
“The next step is for a lot of [portals] to file their own broker-dealer applications,” agrees Vince Molinari, chief executive of portal and technology provider GATE Technologies LLC, which has a broker-dealer subsidiary that partners with portals.
Crowd funders are realizing they're getting into the securities business, Mr. Molinari said, and broker-dealer registration allows them to handle different types of private offerings and do more revenue-sharing deals with investment banks.
“They're realizing if you have some regulation, you might as well have all of it,” he said.
Mr. Eakin said registering his broker-dealer was “relatively straightforward.”
Fundme Securities has a fairly simple business model, with just one line of business — private placements.
Its deals will be for consumer products firms with $1 million to $10 million in revenue, Mr. Eakin said.
Venture capital and angel investors tend to focus on technology companies or larger consumer goods firms, he said. “That's the gap we're trying to fill.”
CircleUp's plan to register a broker-dealer was
reported earlier by Bloomberg Businessweek.
