According to FINRA, Wefunder was fined $1.4 million for failing to comply with securities laws and rules designed to protect crowdfunding investors.

From 2016 through 2021, across 39 separate offerings, Wefunder raised approximately $20 million more than permitted under crowdfunding raise limits. The funding portal did this by diverting excess funds raised in crowdfunding offerings to subsequent offerings 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.

Funding portals are a special type of FINRA member created under the JOBS Act to facilitate crowdfunding offerings under Regulation Crowdfunding (Regulation CF). These portals have limited permitted activities and are subject to specific restrictions designed to protect the mostly retail investors who participate in crowdfunding. One key restriction is that funding portals cannot provide investment advice or recommendations.

FINRA found that Wefunder failed to promptly direct the transmission of funds to issuers or investors as required. The portal also improperly sent emails to hundreds of thousands of investors recommending and soliciting investments being offered on its portal, violating the rule prohibiting such solicitations. Additionally, Wefunder included misleading communications on its funding portal website.

The findings also stated that Wefunder failed to maintain a reasonable supervisory system to supervise its business, including its process for tracking investments. As late as 2021, the portal's own officers recognized in internal emails that its processes were flawed, with one officer criticizing another for failure to delegate.

As part of the settlement, Wefunder will be required to retain an independent consultant to make recommendations to improve its systems and procedures. This remedial measure is designed to address the systemic failures in the portal's operations and supervision.

Crowdfunding offers important opportunities for small businesses to raise capital and for retail investors to participate in early-stage investing. However, these investments carry substantial risks, and the regulatory framework is designed to provide investor protections. When funding portals violate these rules, they undermine investor protections and put crowdfunding participants at risk.

For investors, this case highlights the importance of understanding the limitations and risks of crowdfunding investments. Even registered funding portals can have significant compliance failures. Investors should carefully review offering materials, understand that funding portals cannot provide investment advice, and be skeptical of communications that appear to recommend particular investments.