Jobs-act Title III on the Horizon, FINRA Releases Proposed Funding Portal Rules

By Jonathan B. Wilson CrowdFundBeat Sr. Guest Editor, Partner, Taylor English Duma LLP 

On October 12, 2015, Financial Industry Regulatory Authority, Inc. (“FINRA”) announced that it would file with the Securities and Exchange Commission (“SEC”) a proposed rule change to adopt Funding Portal Rules 100, 110, 200, 300, 800,900 and 1200 (collectively, the “Funding Portal Rules”) and related forms.  In addition, FINRA proposed to adopt new FINRA Rule 4518 (Notification to FINRA in Connection with the JOBS Act) in the FINRA rulebook.

t123-e13825118645101

The proposed 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 amended Funding Portal Rules substantially 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 generally expected to finalize its rules for Title III crowdfunding by the end of the year and FINRA’s Proposed Amendment suggests that it is gearing up to accept applications from prospective Portals as soon as the SEC’s rules are finalized and effective.

Under Title III of the JOBS Act, securities issuers meeting the applicable requirements would be able to sell their securities to the public in exempt offerings so long as 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.

finra

 

 

 

 

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

  • 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. In response to comments, FINRA reasoned that the anti-money laundering rules would be unnecessary because funding Portals are prohibited from holding, managing, possessing or otherwise handling investor funds or securities and are thereby not in a position to facilitate money laundering.  Consequently, FINRA removed the anti-money laundering requirement from its latest proposed rules.
  • Central Registration Depository – FINRA expects that Portals will be required to submit mandatory filing information to FINRA via a submission system it has not yet created. Some commenters suggested that such filings instead be made through the Central Registration Depository, similar to current FINRA Rule 1010(a).  FINRA declined to make any change in its proposed new rules, however, suggesting that there will be greater “regulatory flexibility” in its new submission system.
  • Associated Persons of Portals – In its release, FINRA responded to comments it received regarding the regulation of “associated persons” of Portals through Rule 100(b). It claimed that one commenter suggested that the definition be loosened so as to exclude from the definition employees of a funding Portal whose functions exclusively relate to providing various services to issuers.  FINRA declined to make a change in response, reasoning 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.  On the other hand, however, FINRA also declined to make a change in response to a comment that such associated persons be subject to examination and licensing requirements.  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.”  FINRA stated that it would “enforce any rules for funding portals adopted by the SEC” and, consequently, that there was no need to duplicate the SEC’s rules within FINRA’s rules.
  • Miscellaneous – In its release, FINRA discussed several other comments it had received in the comment process. For each topic, FINRA analyzed the request and concluded that it would be premature to mandate a particular approach at this early stage in the development of the funding Portal business.  FINRA reasoned that it could adopt additional rules later and that foreclosing some business methods at the outset might have undesirable consequences.

While it is too early to predict how Portals will fare under the SEC’s rules, when they are finalized, and FINRA’s rules, if they are adopted, FINRA’s approach in its latest release reflects a mature consideration of the issues and an intention to implement Regulation Crowdfunding in a streamlined and efficient manner.  Prospective Portals should continue to watch for the expected release of the SEC’s final rules, leading to a launch of true interstate crowdfunding in the coming months.

125

 

 

 

 

 

Meet Jonathan Wilson  “Speaker  at REG Plus Master Class Conference October 26th Las Vegas “

About the Author
Jonathan B. Wilson is a partner in the Atlanta business law firm of Taylor English Duma. He has practiced as an attorney for nearly 25 years and has served as the in-house general counsel for two public companies. He represents Fortune 100, middle-market and start-up companies in matters involving securities, corporate finance and governance, mergers and acquisitions, and intellectual property. He is a frequent speaker and writer on the JOBS Act, crowdfunding and Regulation A+.

 

Tags: , , , , , , , , ,

Leave a Reply

Your email address will not be published.

HEADLINE NEWS

Be cautious with crowdfunding  The Week MagazineHere are three of the week's top pieces of financial advice, gathered from around the web: Be cautious with crowdfunding. It's wise to be careful when donating ... [...]

How to avoid getting cheated in crowdfunding, online fundraising campaigns  WPRI 12 Eyewitness News"Crowdfunding" and other online fundraising campaigns are not only easy to share on social media, they're also a quick and effective way to raise money easily ... [...]

Have liberals found new hope through crowdfunding? ‘Time’s Up’ is No. 1 on GoFundMe for 2018  MarketWatchMany people using the popular crowdfunding platform during the year were donating for the first time. [...]

One small step: Orion Span kicks off $2M crowdfunding campaign for space hotel  GeekWireOrion Span, a venture that's planning to put a luxury hotel in orbit, has kicked off a crowdfunding effort aimed at raising up to $2 million in investment. [...]

One small step: Orion Span kicks off $5M crowdfunding campaign for space hotel  GeekWireOrion Span, a venture that's planning to put a luxury hotel in orbit, has kicked off a crowdfunding effort aimed at raising up to $5 million in investment. [...]

Milo Yiannopoulos banned from crowdfunding site Patreon  The GuardianThe far-right activist Milo Yiannopoulos has suffered a setback in his attempts to relaunch his career after being banned by the crowdfunding site Patreon. [...]

What Small Businesses Need to Know About Equity Crowdfunding  Business News DailyCrowdfunding puts the control back in the hands of startup founders by allowing them to raise capital. Find out how to get started. [...]

Jump on the Bandwagon: Blockchain Ticketing Platform Runs Equity Crowdfunding Campaign  Black EnterpriseBandwagon CEO Harold Hughes shares how blockchain is transforming the ticket market and how he plans to scale his business using equity crowdfunding. [...]

What crowdfunding is really about  Financial TimesImagine you're a small, fast-growing business. You attract £20m from a single, institutional investor. Suddenly, there's a public relations crisis. You hire a ... [...]

Greek government plans crowdfunding for new warships  NavyTimes.comGreece's defense minister is appealing to his austerity-battered countryfolk for a crowdfunding effort to raise money for new warships, promising to donate part of ... [...]

CFB Finance

Marketwired

  • Crowdfunding
  • Crowdfund
  • Peer to Peer Lending
  • FinTech
  • Reg A+
  • Reg CF
  • Crowdfunding USA

Press Release

Blockchain Crypto Events

2020fintech.com Increase your visibility in space through the presentation speaking and sponsorship “Pitches and STO Launches” pic.twitter.com/6E0rv5tOOT

Live Crowdfunding .tv

What's Next Step in Regulation A+ JOBS ACTS Title IIII :L Interview : Steve Cinelli with Brian Korn Securities and Crowdfunding/Peer-to-Peer Lending Lawyer, Watch more video library | Conference | Interview | Campaign Showcase | Research | Education |