Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Saturday, July 7, 2012

FINRA Seeks Comment on Regulation of Crowdfunding Activities

FINRA recently posted on its website a request for public comment on proposed regulation of crowdfunding activities. (Download FINRA.NTM12-34)  The JOBS Act requires that intermediaries performing crowdfunding on behalf of issuers must register with the SEC as a "funding portal" or broker and must register with an applicable SRO.  FINRA seeks comment on the appropriate scope of FINRA rules that should apply to member firms engaged in crowdfunding activities.

As FINRA noted in its Notice to Members:

The regulatory scheme established by Congress expressly contemplates a role for an organization such as FINRA by mandating that each registered funding portal be a member of an applicable SRO. However, Congress limited a national securities association’s examination and enforcement authority over such registered funding portals to its rules
“written specifically for registered funding portals.”

Accordingly, FINRA seeks comment on two categories of rules: those that would apply specifically to members acting as funding portals and those applicable to members acting as brokers.  According to the Notice:

In writing rules specifically for registered funding portals, FINRA would seek to ensure that the capital-raising objectives of the JOBS Act are advanced in a manner consistent with investor protection. Commenters are encouraged to identify the types of requirements that should apply to registered funding portals, taking into account the relatively limited scope of activities by a registered funding portal permitted under the JOBS Act. Comments are particularly requested about possible rules concerning supervision, advertising, anti-money laundering, fraud and manipulation, and just and equitable principles of trade.

FINRA also solicits comment on the application of existing FINRA rules to crowdfunding activities of broker-dealers. Unlike the rules applicable to registered funding portals, the JOBS Act does not limit the FINRA rules applicable to registered broker-dealers engaging in crowdfunding activities. Nevertheless, FINRA invites comments from broker-dealers regarding the application of existing FINRA rules to broker-dealers’ crowdfunding activities and whether such rules should be relaxed to address a broker-dealer’s crowdfunding activities, taking into account, among other things, the extent to which a broker-dealer may be able to isolate its crowdfunding business, or otherwise places limitations on its activities akin to those for registered funding portals. FINRA requests information from broker dealers that may engage in crowdfunding concerning the organizational structure through which this activity would occur within the firm (e.g., through the broker-dealer entity or a separately identified department). FINRA also requests comment on whether engaging in crowdfunding might present special conflicts or concerns for a broker-dealer, such as might arise if a registered representative were to recommend that a customer visit the firm’s crowdfunding site.

Comments are due by August 31.

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