The intermediary in a crowdfunding transaction has control over the platform where securities of registered issuers are listed. The intermediary has the obligation to institute measures to reduce the risk of fraud, working on reasonable belief on what it should allow or not allow.
WHEN TO GRANT ACCESS
The crowdfunding intermediary should allow a transaction through its platform when it has reasonable basis to believe that:
A. An issuer seeking to offer and sell securities shall not commit any form of fraud, including the transactions covered by Section 26 of the Securities Regulation Code (SRC) and the related requirements of this part. Section 26 provides that it shall be unlawful for any person, directly or indirectly, in connection with the purchase or sale of any securities to:
- (i) Employ any device, scheme, or artifice to defraud;
- (ii) Obtain money or property by means of any untrue statement of a material fact of any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or
- (iii) Engage in any act, transaction, practice or course of business which operates or would operate as a fraud or deceit upon any person.
In satisfying this requirement, an intermediary may rely in the representations of the issuer concerning compliance with these requirements unless the intermediary has reason to question the reliability of those representations.
B. The issuer has established means to keep accurate records of the holders of the securities it would offer and sell, provided that an intermediary has reason to question the reliability of those representations.
WHEN TO DENY ACCESS
The crowdfunding intermediary must deny access to its platform if it has reasonable basis for believing that:
A. Any of the following is subject to disqualification under Article Four Chapter Two (Disqualification of Issuer):
- (i) the issuer, or
- (ii) the issuer’s officers, directors (or any person occupying a similar status or performing a similar function)’ or
- (iv) beneficial owners of 20 percent or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power.
In satisfying this requirement, an intermediary shall, at a minimum, conduct a background and securities enforcement regulatory history check on each issuer whose securities are offered by the intermediary and on each officer, director or beneficial owner of 20 percent or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power.
B. The issuer of the offering presents the potential for fraud or otherwise raises concerns about investor protection. In satisfying this requirement, an intermediary shall deny access if it reasonably believes that it is unable to adequately or effectively assess the risk of fraud of the issuer or its potential offering. In addition, if an intermediary becomes aware of information after it has granted access that causes it to reasonably believe that the issuer or the offering presents the potential for fraud or otherwise raises concerns about investor protection, the intermediary shall promptly remove the offering from its platform, cancel the offering, and return (or for funding portals, direct the return of) any funds that have been committed by inventors in the offering.
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