Can people use credit cards to invest in securities offerings? And if yes, how can issuers enable that?
This has been a constant request. The thinking is that since Kickstarter allows people to contribute via a credit card, it must be possible to invest in a securities offering. Even the SEC realized this and specifically called for allowing the use of credit cards in Title III offerings in the final crowdfunding rules.
But why is nobody yet doing this? And what about Reg A or Reg D offerings? Lets answer these:
Reg CF (crowdfunding): YES!
The rules clearly permit the use of credit cards. However, thus far no credit card company has allowed it to happen.
Reg’s A & D: MAYBE!
The rules do not specifically state that credit cards cannot be used. And there is nothing in SEC regulations stating that credit cards are disallowed. However, broker-dealers and investment advisers are pretty much handcuffed by “Know Your Customer” and “Suitability” regulations. Regulators would unquestionably take a negative stance on any regulated person allowing someone to invest and go into credit card debt. Broker-dealers, in particular, have a lot of rules to follow when it comes to extending credit to investors; click here to see margin risks and requirements.
So if a company’s Reg A or 506(c) offering has a broker-dealer involved, then they probably won’t be able to accept investments via credit cards.
=> However, if a company is not using a broker-dealer, which is now the case for the overwhelming majority of direct-to-crowd offerings, then there are no such restrictions.
Using Credit Cards Can Cut Two Ways
On one hand, it makes things extremely easy on the investor, far easier than ACH transactions. This reduces friction and encourages investment. On the other hand, however, it could expose the company (and credit card processor) to risk of chargebacks, which is up to 180 days, and it could also lead to some people making poor choices in going into debt, or trying to arbitrage their cards. Though I personally feel that those situations would be extraordinarily rare, and most people would just use their cards for convenience of payment.
Okay, so you want to allow your investors to use credit cards to make investments? How?
This Would Be a 2 Step Process…
=> First, the company needs to get a merchant account with a credit card company (and inform the merchant processor what the account will be used for: investors). The landing place for deposits from the credit card company will be the specific escrow bank account at Prime Trust.
=> Second, the Invest Now technology would need to link investors to a company form hosted (usually) by the credit card company or processor such as Authorize.net, NetBilling, PayPal, WePay, Stripe, etc.
Conclusion
If you’re not regulated, then go for it. You get the merchant account, Prime Trust will land and account for the funds.
About the Author: Scott Purcell is the CEO of FundAmerica, a fintech services provider to the emerging equity and debt crowdfunding industry. His firm provides escrow, payment processing, and compliance technology for numerous broker-dealers, investment advisers, portals and others who make a business of online capital formation pursuant to rules now in effect thanks to the JOBS Act. FASTransfer is the only tech-driven SEC registered transfer agent focused on the crowd-industry. He is a founding Board member of the Crowdfunding Intermediary Regulatory Association (CFIRA) and the author of the book “The Definitive Guide to Equity and Debt Crowdfunding” as well as the “Industry Best Practices for Funding Portals”.
Legal Disclaimer:
These materials are my personal opinions and for informational purposes only and not for the purpose of providing legal or tax advice. I am not advocating, advising or recommending anyone purchase any specific or general investment of any type, ever. The issues discussed include complicated areas of law and legal advice should only be obtained and relied upon from a securities attorney about your specific circumstances.
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