If a crowdfunding platform shuts down, who is still responsible for sending distributions?

Question

A subscription agreement often contains a sentence worth stopping on. The platform describes itself as the portal and the technology provider. The issuer is a separate LLC controlled by the sponsor, and investor money goes into that LLC, not into the platform itself. Which means the investor's legal relationship is with the sponsor's entity, and the platform is effectively a website that made the introduction. If a platform closes its doors mid-hold, say in year three of a six year deal, a membership interest still exists and the sponsor still owes whatever the operating agreement specifies. What an investor loses is the dashboard, the document repository, the investor relations inbox, and possibly the administrator who was calculating and sending distributions. That last part is the one that deserves scrutiny before investing, not after. Some platforms handle fund administration themselves. Some leave it to the sponsor. In a number of offerings the documents do not make clear which one it is. So the real question is how much weight to put on the platform's survival. One view: it barely matters, since an investor is really buying a sponsor and a project, and the portal is a distribution channel that can vanish without touching the underlying asset. The other view: it matters considerably, because a wind-down means records, reporting, and tax documents route through whoever picks up the pieces, with the investor having no vote on who that is. That second risk is worth pricing explicitly rather than assumed away, and it is worth asking any sponsor directly which entity handles fund administration before committing capital.

ryanmck27 · Answer

Quarry, the question I'd add to yours is who holds the investor register. If the platform maintains the list of members and the platform goes away, does the sponsor have a current copy? I asked that on one offering and got a confident yes with no explanation of the mechanism, which didn't settle it.

marcus_hale41 · Answer

I ask about this before I ask about returns now, and the answers separate sponsors fast.

Three things I want named in writing. Who is the fund administrator and are they a third party engaged by the issuer or a service of the platform. Where is the members register maintained and who has a copy. Who prepares and files the entity's tax returns and issues the K-1s. If the administrator is engaged by the issuer under its own contract, the platform going away is mostly an inconvenience and you get worse-looking updates by email. If the platform is doing the administration as part of its own offering, you have a real dependency and a wind-down puts your reporting in the hands of whoever the receiver or successor hires.

On one deal I passed on, the operating agreement named the manager as responsible for all books and records and then a separate services agreement subcontracted every one of those functions to the platform. The sponsor had no internal capability at all. That's the version quarry should worry about.

Halyard's register question is the sharpest one here. I've started asking for confirmation that the issuer holds its own current register independently, and the wording of the answer tells you whether anyone has thought about it before you asked.

If a crowdfunding platform shuts down, who is still responsible for sending distributions?

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