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.

Authors
Brian S. Korn
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Emails

From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.