When making investments, an investor may come across a funding portal or a broker-dealer platform. While both are intermediaries that allow investors to invest in startups, there are many differences in the types of investment opportunities, the standards each must follow, and who is able to invest. In this blog, we’ll explore the similarities and differences, the regulations surrounding each, and define funding portals vs broker-dealers.

Funding Portals vs Broker-Dealers

What are Funding Portals?

Funding portals were created by Title III of the JOBS act in 2016 and are online platforms that facilitate crowdfunding offerings. These platforms primarily cater to startups and small businesses seeking funds from individual investors. Startups raising on a funding portal may be offering different types of crowdfunding opportunities, like equity or debt crowdfunding.

What are Broker-Dealer Platforms?

Broker-dealer platforms, like MicroVentures, are also online platforms that facilitate investment opportunities; however, they can host a wider variety of opportunities beyond crowdfunding offerings. A broker-dealer platform can also host investment opportunities that are only available for accredited investors, those who meet specific financial or professional knowledge criteria. Non-accredited investors can find investment crowdfunding opportunities on a broker-dealer and accredited investors can find investment opportunities spanning SEC exemptions including Regulation A (Reg A) and Regulation D (Reg D).

Similarities and Differences

Similarities

Funding portals and broker-dealer platforms are similar in a couple of areas:

• Investment opportunities: Both funding portals and broker-dealer platforms have the same core offering: connecting investors with investment opportunities.
• Registration: Funding portals and broker-dealers must be registered with the SEC and be a member of FINRA.
• Audience: Both accredited and non-accredited investors are able to sign up for accounts on a funding portal or broker-dealer platform. However, the available opportunities for non-accredited investors may be more limited on broker-dealer platforms than funding portals.
• Financial Instruments: In general, the types of financial instruments hosted across funding portals and brokers dealers can be relatively similar. Across funding portals and broker-dealers, investors may be able to invest in crowd notes, convertible notes, preferred stock, common stock, or crowd SAFEs.

Differences

While on the surface, funding portals and broker-dealers may look similar, they have core differences:

Regulations

While funding portals and broker-dealers both must register with the SEC and be a member of FINRA, the specific rules and regulations are more stringent for broker dealers. For example, broker-dealers must adhere to Know Your Customer (KYC) and Anti-Money Laundering (AML) standards while funding portals do not. This entails verifying identities, confirming accreditation status for Reg A and Reg D offerings, and other standards.

Additionally, broker-dealer platforms are able to offer investment advice/recommendations, solicit investments for investment opportunities, compensate employees for solicitation, and directly manage and possess investor funds and securities. Because funding portals are not held to the same standards as broker-dealers, funding portals cannot partake in any of these activities.

Due Diligence

In the face of more stringent regulations than funding portals, broker-dealers are also held to higher-due diligence standards. Broker-dealers are held responsible for ensuring that a potential investor is fully informed of the investment opportunity, from reliably truthful facts about the business to the risks involved with investing.

Opportunities

Like mentioned previously, one of the differences between funding portals and broker-dealer platforms are the investment opportunities hosted on each platform. Funding portals are only enabled to host crowdfunding offerings. Broker-dealer platforms are also allowed to host crowdfunding offerings, but can also host additional offerings through Reg A and Reg D, typically only open to accredited investors.

Final Thoughts

When choosing to sign up as an investor on a funding portal or a broker-dealer platform, it is important to be informed of the similarities and differences between each – from the regulations and due diligence standards to the types of opportunities found on each intermediary. Each one can offer unique opportunities and investment options, making each one suitable for different investor types and their investment goals.

Are you looking to invest in startups? Sign up for a MicroVentures’ broker-dealer platform to start investing!

Want to learn more about resources for investors? Check out the following MicroVentures blogs to learn more:

• Slice of the Pie: Navigating Ownership Dilution in Startup Investments
• Popular Books and Podcasts for Investors
• Evaluating Pitch Decks as a Startup Investor
• Understanding Secondary Transactions: Right of First Refusal
• Investing in Crowdfunding as an Accredited Investor

*****

The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.