• FINRA Proposes Rules for Crowdfunding Portals
  • November 8, 2013 | Author: Rebecca H. Forest
  • Law Firm: Lowndes, Drosdick, Doster, Kantor & Reed Professional Association - Orlando Office
  • On October 23, 2013, parallel with the SEC’s announcement of proposed crowdfunding rules, FINRA published proposed rules to implement registration and regulation of on-line crowdfunding portals.[1]

    As mandated by the JOBS Act, funding portals utilized by issuers to raise capital via crowdfunding will be required to register with the SEC and become a FINRA member.  The proposed FINRA rules will require crowdfunding portals to comply with FINRA bylaws and certain FINRA rules which generally have been streamlined to reflect the limited activities of crowdfunding portals.  Such activities generally are limited to providing the public with specified information about issuers engaged in crowdfunding and their proposed offerings and serving as a communications intermediary between issuers and potential investors.  The SEC also expects the portals to play a role in preventing fraud in crowdfunding activities.  For example, portals will be required to conduct background and other securities laws compliance checks of issuers to ensure that persons subject to “bad actor” disqualifications do not have access to the funding portal.  Portals also will be required to provide potential investors with certain educational materials regarding investing and risks associated with securities investments.  Portals will not be permitted to offer investment advice, solicit investments on behalf of any issuer, compensate employees for soliciting investments, or hold or otherwise handle investment funds or securities of crowdfunding issuers.

    The proposed rules provide for a streamlined and shorter application process using a simplified version of Form BD.  Standards for approval will include (1) establishing a system to ensure compliance with applicable federal securities laws and regulations (including an anti-money laundering program), (2) having the arrangements and business relationships necessary to commence operating, (3) establishing an appropriate supervisory system, (4) obtaining sufficient sources of capital, and (5) providing for an appropriate recordkeeping system.

    Funding portal members will be required to maintain minimum required fidelity bond coverage.  Members will be required to observe high standards of commercial honor and just and equitable principals of trade in their operations.  The proposed rules will prohibit funding portal members from engaging in manipulative, deceptive or other fraudulent devices in effecting or inducing transactions in securities and making false or misleading statements.  

    Funding portal members generally will be subject to FINRA rules regarding investigations and sanctions of members, FINRA’s Code of Procedure and FINRA dispute mediation and arbitrating procedures.    

    The period for submitting comments to the proposed rules will continue until February 3, 2014.  FINRA is seeking comment on specific issues, including, among others, whether or not associated persons of funding portal members should be subject to some form of licensure, whether certain financial responsibility or net capital requirements should be adopted in lieu of requiring fidelity bonds, the scope of the supervisory system, whether the proposed rules will be too burdensome given the limited scope of funding portal activities, and whether the proposed rules will adequately protect investors.


    [1]  http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p370743.pdf