Shooting the Messenger: The Liability of Crowdfunding Intermediaries for the Fraud of Others

Abstract

The new federal crowdfunding exemption in section 4(a)(6) of the Securities Act requires that securities be sold only through regulated intermediaries — brokers and funding portals. Much of the information appearing on those crowdfunding intermediaries’ platforms will be provided by someone other than the intermediary. Crowdfunding intermediaries must post extensive disclosure provided by issuers of the securities being sold. Under the SEC’s proposed rules, they must also provide communication channels where prospective investors and others may post comments.

Neither the statute nor the proposed rules say much about the intermediary’s obligation to verify the information posted by others or its liability if that information is false or misleading. The result under the securities antifraud rules is unclear. Unless the law is clarified, crowdfunding intermediaries face a significant risk of liability that could make crowdfunded securities offerings unfeasible.

I argue that crowdfunding intermediaries should be liable for information provided by others in only three circumstances: (1) if they knew the posted information was false; (2) if they were aware of red flags that should have alerted them to the fraud; or (3) if they recommend a particular security or offering without an adequate investigation.

Keywords: crowdfunding, liability, securities, intermediaries