FINRA’s Latest Proposed Funding Portal Rules and Fees “charts”

By Lauren Leibowitz, CrowdFundBeat Guest Contributor, Principal at 1st BridgeHouse Securities, LLC,

On October 9, 2015, 2 years after FINRA first published its proposed Funding Portals rules , FINRA published the amended proposed Funding Portal Rules to the Securities and Exchange Commission (SEC). The following are FINRA’s proposed rule submissions:

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1. SR-FINRA-2015-040
a. Adopt Funding Portal Rules 100,110,200, 300, 800,900 and 1200 and related forms.
b. Adopt FINRA rule 4518: Notification to FINRA in Connection with the JOBS Act.

2. SR-FINRA-2015-041: Adopt Section 15 of Schedule A to the FINRA By-Laws governing fees for funding portals that are FINRA Members.

In April 2012, when the JOBS Act was signed, there were intentions for the “crowdfunding exemption” to be in effect by the end of the year. Under Section 302 of the JOBS Act (2012), a crowdfunding intermediary that engages in crowdfunding on behalf of issuers relying on the JOBS Act’s “crowdfunding exemption” is required to register with the SEC as a “funding portal” or broker and to register with an applicable self-regulatory organization. Title III of the JOBS ACT defines “funding portal” as any person acting as an intermediary in a transaction involving the offer or sale of securities for the account of others, solely pursuant to Securities Act Section 4(a)(6) (15 U.S.C. 77d(a)(6)), that does not: (1) offer investment advice or recommendations; (2) solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal; (3) compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal; (4) hold, manage, possess, or otherwise handle investor funds or securities; or (5) engage in such other activities as the Commission, by rule, determines appropriate. Three and a half years later, funding portal rules are still being molded by FINRA with hopes that before 2016 the crowdfunding exemption will be in effect.

The crowdfunding exemption would enable private issuers to publicly raise less than $1 million in a 12 month period. The crowdfunding exemption is commonly referred to as “equity crowdfunding’ since securities are being issued, as opposed to reward crowdfunding where rewards such as T-shirts and credits are promised. The crowdfunding exemption allows both unaccredited and accredited investors to participate in investing in early stage private Issuers.

FINRA has taken into account the numerous comment letters received when amending the proposed rules. FINRA noted that the changes to the proposed funding portal rules consider the limited capabilities of funding portals. As the funding portal business evolves, FINRA will implement the appropriate rules and standards, while not duplicating the SEC’s Rules, in order to always make sure investors are protected. The SR-FINRA-2015-040 release highlights are:

1. The proposed Funding Portal Rules consist of a set of seven rules and related forms:
•  Funding Portal Rules 100- General Standards
• Funding Portal Rules 110- Funding Portal Application
• Funding Portal Rules 200- Funding Portal Conduct
• Funding Portal Rules 300- Funding Portal (i.e There must be a designated                                  executive representative, but a named chief compliance officer is not required.)
• Funding Portal Rules 800- Investigations and Sanctions
• Funding Portal Rules 900 – Code of Procedure
• Funding Portal Rules 1200- Arbitration and Mediation
• Form FP-NMA
• Form FP-CMA
• Funding Portal Rule 300(c) Form
• Form FP (Statement of Revenue )

2. FINRA is proposing to adopt new FINRA Rule 4518: Notification to FINRA in Connection with the JOBS Act. New FINRA Rule 4518 would apply to a registered broker member.
A member shall notify FINRA [in connection of the Jobs Act]:

i. prior to engaging, for the first time, in a transaction involving the offer or sale of securities in reliance on Section 4(a)(6) of the Securities Act; or

ii. 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 SEC Regulation Crowdfunding.

3. FINRA is not proposing at this time the original proposed rule that would require funding portal members to maintain fidelity bond coverage or a net capital/financial responsibility requirements. FINRA will observe the developing of funding portal business to determine if fidelity bond or various financial responsibility requirements are necessary.

4. FINRA is not proposing at this time the original proposed rule that would require funding portal members to develop and implement a written anti-money laundering program. An anti-money laundering program is a critical compliance component to registered broker dealers today.

5. There will be a submission system created for funding portals to submit the required information to FINRA.

6. As this time, FINRA is not modifying the definition of an associated person of a funding portal, which is mainly based on the current FINRA By-Laws that applies to broker dealers. Since the funding portal business is still developing and portals have a limited scope of allowed activities, FINRA will be looking at funding portal business models and services to learn more about the needs, if any, of licensing and examinations of associated persons.

The funding portal proposed fees in SR-FINRA-2015-041 are outlined below.

proposed FINRA funding portal fee tableWe are glad to see progress by FINRA as it relates to funding portal rules and standards. FINRA seems to be taking a wait-and-hope-for-the-best approach. Since funding portal capabilities are limited in scope and there is not yet a business model to review and regulate, FINRA believes it is best to issue a regulatory framework and fill in the gaps as needs arise, which is always a fun process for those early innovators and adopters. Stay tuned because equity crowdfunding may soon be a reality (unless there is another regulatory delay).

If you have a questions about any of the items on the Capital Raise Assessment then contact 1st BridgeHouse Securities at Info@1stBridgehouse.com or (786) 375-5644.

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Lauren LeibowitzPrincipal at 1st BridgeHouse Securities, LLC,

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