FINRA – new Rules for Funding Portals

On October 12, 2015, Financial Industry Regulatory Authority, FINRA revealed that it would file with the Securities and Exchange Commission (“SEC”) an amended rule change to adopt Funding Portal Rules 100, 110, 200, 300, 800,900 and 1200 (collectively, the “Funding Portal Rules”) and related forms. In furthermore, FINRA proposed to adopt new FINRA Rule 4518 (Notification to FINRA in Connection with the JOBS Act) in the FINRA rulebook.
The rules laid forth are part of FINRA’s effort to implement the crowdfunding provisions of Title III of the Jumpstart Our Business Startups Act (“JOBS Act”). The proposed Funding Portal Rules significantly reduce the regulatory burdens on prospective crowdfunding portals (or “Portals”) compared with FINRA’s initial set of proposed rules. (See proposing release 13-34, October 2013).

It is anticipated that the SEC will complete its rules for Title III crowdfunding by year’s end and FINRA’s Proposed Amendment implies that it’s perhaps gearing up to accept applications from prospective Portals as soon as the SEC’s rules are deemed finalized and in effect.

Under Title III of the JOBS Act, securities issuers meeting the applicable requirements are able to sell their securities to the public in exempt offerings provided that solicitations were conducted on licensed crowdfunding Portals. To make sure that offerings met the standards of the JOBS Act, the SEC proposed to regulate Portals through FINRA and, in 2013, FINRA proposed an initial slate of rules for prospective Portals. Therefore, FINRA proposed to consider Portals as a separate category of FINRA member (distinct from broker-dealers) with minimal regulatory requirements.

This latest iteration of the Funding Portal Rules is an additional reduction in regulatory burdens on potential Portals. Particularly:

Fidelity Bond – The 2013 proposed Funding Portal Rules would have required Portals to maintain fidelity bond coverage. In response to some public comments, FINRA has eliminated the requirement of a fidelity bonding, reasoning that its removal would be “in the interest of reducing potential burdens on prospective funding portal members given the limited nature of funding portal business and given that regulatory experience with funding portals is developing.”
Anti-Money Laundering – The 2013 proposed Funding Portal Rules included a proposed requirement that funding portal members implement a written anti-money laundering program.
Central Registration Depository – FINRA anticipates that Portals will be required to submit mandatory filing information to FINRA via a submission system it has not yet created.
Associated Persons of Portals – In its release, importantly FINRA responded to comments it received regarding the regulation of “associated persons” of Portals through Rule 100(b). FINRA declined to make any changes in response, arguing that the services to be provided to issuers will be an important component of the business model of many fund Portals and, accordingly, an appropriate subject of regulation. FINRA reasoned that it was too early to impose such a requirement but that examination and licensing might be appropriate in the future “as FINRA gains experience under the proposed rules.”
Application of Additional Rules – Some commentators suggested that FINRA should incorporate into its rules those rules from the FINRA rulebook that currently apply to broker-dealer members or that FINRA should duplicate, within the proposed Funding Portal Rules, standards adopted by the SEC in Regulation Crowdfunding. FINRA declined to expand its rules in this way, however, reasoning that its intent was “to streamline the proposed rules to the extent possible to reflect the limited scope of activity permitted by funding portals while also maintaining investor protection
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Find out about Rule 506 Reg D. www.propfunds.com/blog/2015/03/how-rule-506-of-regulation-d-affects-crowdfunding-investors