United States: FINRA: Funding Portals, Start Your Engines!

Last Updated: October 27 2013
Article by Brian S. Korn and Sean-Tamba Matthew

The regulatory framework for the crowdfunding exemption created under the Jumpstart Our Business Startups Act of 2012, or JOBS Act, is beginning to take shape. On the same day the Securities and Exchange Commission (SEC) published crowdfunding rules for comment (See Pepper's October 23, 2013 Client Alert, "SEC Proposes Crowdfunding Rules"), the Financial Industry Regulatory Authority (FINRA) issued rules governing funding portals.

If you've never heard of a funding portal, don't fret – it is a new type of financial intermediary that was created by Congress under the JOBS Act to facilitate equity crowdfunding to the general public. Under the JOBS Act, issuers using the crowdfunding exemption to offer securities to the public (as opposed to accredited investors) must offer and sell their securities through SEC-registered broker-dealers or funding portals that have registered as crowdfunding intermediaries. The act further requires funding portals to gain membership in a national securities association – spoiler alert: FINRA is the only national securities association. The full text of FINRA's proposed rules, forms, and the accompanying regulatory notice may be read at: http://www.finra.org/Industry/Regulation/Notices/2013/P370744.

The newly proposed funding portal application rules and forms provide for a "slimmed down" application of current FINRA broker-dealer rules on funding portals. Sort of an all-star team of your old favorites, but now in a convenient funding portal size.

Applying to be a funding portal and maintaining compliance with the "new" rules is not an undertaking to be taken lightly or for the faint of heart. Below is an outline of the new FINRA rules and their relationship to current FINRA broker-dealer rules:

Proposed Funding Portal Rules

Summary of Rule

Rule 100 – General Standards

  • Provides that FINRA by-laws apply to funding portals and associated persons.

Rule 110 – Establishes membership application process for funding portals

  • Provides for approval decisions within 60 days after an application is filed, as opposed to 180 days for broker-dealer applications.
  • Consolidates the 14 application standards under FINRA's Form NMA and CMA Series for broker-dealers into five standards:
    1. ability to comply with federal securities laws and FINRA rules
    2. business relationships and contractual arrangements that demonstrate ability to initiate business operations
    3. supervisory system
    4. direct and indirect funding sources, and
    5. recordkeeping systems.
  • Requires funding portal members to maintain fidelity bond coverage.

Rule 200 – Establishes professional conduct standards for funding portals

  • Generally based on the FINRA Rule 2010 Standards of Commercial Honor and Principles of Trade.

Rule 300 – Establishes supervisory structure for funding portals

  • (a) Requires funding portals to supervise the activities of associated persons.
  • (b) Requires a written anti-money laundering compliance program, but allows independent testing for compliance every two years.
  • (c) Requires reporting of regulatory proceedings and disciplinary activities.

Rule 800 – Investigations and Sanctions

  • Generally subjects funding portals to FINRA investigations and sanctions (FINRA Rule 8000 Series).

Rule 900 – Code of Procedure

  • Generally applies the FINRA Code of Procedures (FINRA Rule 9000 Series) to funding portals.

Rule 1200 – Arbitration and Mediation

  • Generally applies FINRA arbitration and mediation procedures (FINRA Rule 12000 Series, 13000 Series, and 14000 Series) to funding portals.

As a reminder, under the JOBS Act and the SEC's proposed rules, funding portals are very limited in their role facilitating public equity crowdfunding, yet are still bestowed with great responsibility. Specifically, funding portals are prohibited from:

  • offering investment advice or recommendations
  • soliciting purchases, sales or offers to buy the securities
  • compensating employees based on sales, and
  • holding, managing or possessing investor funds or securities.

On the other hand, funding portals must do all of the following:

  • provide disclosures related to risks and other investor education materials as the SEC shall require
    • ensure that each investor reviews investor education materials
    • obtain investor representation that he or she understands:
      • that entire investment is at risk
      • that investing in start-ups and emerging companies is risky, and
      • that crowdfunding investments are illiquid
  • obtain background check on officers, directors and 20 percent or greater shareholders
  • file with SEC and distribute disclosure materials at least 21 days prior to first sale date
  • ensure offering proceeds are only provided to the issuer when the raise has met its target; if the target is not met, it must allow investors to cancel orders
  • make efforts to ensure no investor exceeds the individual crowdfunding investment cap across all transactions
  • protect investor privacy
  • not work with issuers where a portal officer, director or partner has a financial interest.

FINRA has requested comments on all aspects of the proposed funding portal rules, and has made specific requests for comments on the following issues:

  • adequacy of investor protections
  • non-imposition of licensing requirements on associated persons of funding portal members
  • cost of fidelity bond coverage for funding portals
  • cost of implementing and maintaining supervisory systems
  • propriety of regulatory burden placed on funding portals
  • accommodating the scope of the funding portal business.

The comment period will expire on February 3, 2014.

Pepper Points

  • FINRA has done a commendable job streamlining a highly complex broker-dealer registration and compliance regimen to tailor it for funding portals.
  • FINRA has not proposed that funding portal representatives be licensed (e.g., by maintaining a Series 7, 24 or 63 exam).
  • Many of these rules appear to be "check the box" standards, but FINRA will have broad examination and disciplinary authority over funding portals.
  • Time will tell if enough entrepreneurs are interested in starting funding portals given the still high-touch regulations and the overall viability of public equity crowdfunding.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Brian S. Korn
Similar Articles
Relevancy Powered by MondaqAI
Sheppard Mullin Richter & Hampton
Morrison & Foerster LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Sheppard Mullin Richter & Hampton
Morrison & Foerster LLP
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions