FINRA Fines Wefunder $1.4 Million and StartEngine Capital $350,000 for compliance violations

May 4, 2022 Equity Crowdfunding, Alternative Funding, FinTech and Alternative Finance, Fintech International, Fundraising, Investing, Trading, Legal Issues, Regulation, Consultation, Online Funding / Investing Portals No comments

Finra | Press release | May 4, 2022

WASHINGTON, May 04, 2022--(BUSINESS WIRE)--FINRA announced today that it has fined two FINRA-registered funding portals a combined $1.75 million for failing to comply with securities laws and rules designed to protect crowdfunding investors. In settling these matters, Wefunder and StartEngine accepted and consented to the entry of FINRA’s findings without admitting or denying them.

Jessica Hopper, Executive Vice President and Head of FINRA’s Department of Enforcement:

Today’s actions highlight FINRA’s vigilance over this developing area of securities regulation and our unrelenting focus on investor protection.

FINRA regularly examines and conducts ongoing surveillance of funding portal members to determine compliance with FINRA's funding portal rules and SEC requirements. The Wefunder and StartEngine matters both originated from FINRA’s examination program.

See: US Investment Crowdfunding Exemptions Explained

In the Wefunder matter, FINRA found that from 2016 through 2021, across 39 separate offerings:

Wefunder raised approximately $20 million more than permitted under crowdfunding raise limits. It did this by diverting the excess funds raised in the crowdfunding offering to a subsequent offering conducted under a different exemption from registration. FINRA found that by doing so, Wefunder exceeded the scope of its permitted activities as a funding portal
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
Failed, in multiple respects, to maintain a reasonable supervisory system to supervise its business, including, for example, its process for tracking investments.

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.

See: Reg CF: Investment Crowdfunding Tops $1 Billion on Heals of Funding Cap Increase

In the StartEngine matter, FINRA found that at various points between November 2016 and January 2018:

StartEngine included issuer communications on its funding portal website 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
Failed to reasonably supervise potentially misleading issuer-prepared content

For example, one issuer, whose product was a home robot, exaggerated the robot’s level of functionality in a demonstration video posted on the StartEngine website. The video depicted the robot independently performing tasks such as waking sleeping family members, teaching a child piano and art, projecting a recipe onto a cutting board, patrolling a home for intruders, adjusting a thermostat and playing peek-a-boo with a child. During the offering, StartEngine received information that caused it to know or had reason to know that these claims were exaggerated and misleading, but it failed to correct them. Although a disclaimer on the offering page noted that the robot was a work-in-progress, it was insufficient to remediate the misleading content.

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