New Crowdfunding portal rules – FINRA

On October 12, 2015, Financial Industry Regulatory Authority, FINRA proposed the adoption of Funding Portal Rules 100, 110, 200, 300, 800, 900 and 1200 (collectively, the “Funding Portal Rules”) and related forms. The new proposed rules and modifications were promulgated according to the 2012 JOBS Act which “prohibits funding portals from a variety of activities, including offering investment advice or recommendations, soliciting transactions for securities displayed on their websites, compensating employees for securities solicitations, and holding investor funds or securities.” As part of its objective, FINRA also proposed the adoption of new FINRA Rule 4518 (“Notification to FINRA in Connection with the JOBS Act”) in the FINRA rulebook.

The proposed Funding Portal Rules consist of the following set of seven rules and their related forms:

Funding Portal Rule 100 (“General Standards”);
Funding Portal Rule 110 and Forms (“Funding Portal Application”);
Funding Portal Rule 200 (“Conduct”);
Funding Portal Rule 300 (“Compliance”);
Funding Portal Rule 800 (“Investigations and Sanctions”);
Funding Portal Rule 900 (“Code of Procedure”); and
Funding Portal Rule 1200 (“Arbitration and Mediation”).

FINRA’s proposed Rule 4518 applies to registered broker members and also rules that a member of FINRA should notify it in the manner prescribed by FINRA:
prior to engaging, for the first time, in a transaction involving the offer or sale of securities in reliance on Section 4(a)(6) (“Exempted Transactions”) of the Securities Act; or
within 30 days of directly or indirectly controlling, or being controlled by or under common control with, a funding portal as defined pursuant to Rule 300(c)(2) of the SEC’s proposed crowdfunding regulations.

In a related filing, FINRA proposed a rule change to adopt Section 15 of Schedule A to the FINRA By-Laws, which would govern fees for funding portals. The new rules appear less burdensome and restrictive than those that were previously proposed. It must be explained how the new rules are part of FINRA’s effort to implement the crowdfunding provisions of Title III of the Jumpstart Our Business Startups Act (“JOBS Act”). The new Funding Portal Rules significantly lighten the regulatory burdens on prospective crowdfunding portals (or “Portals”) in comparison to FINRA’s initial set of proposed rules. (See proposing release 13-34, October 2013). The SEC is due to finalize its rules for Title III crowdfunding by year’s end and FINRA’s Proposed Amendment suggests that it is getting ready to accept applications from prospective Portals as soon as the SEC’s rules are completed and effective.

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 ensure that offerings met the requirements 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. FINRA proposed to treat Portals as a separate category of FINRA member (distinct from broker-dealers) with minimal regulatory requirements.

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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