While the SEC missed its end-of-the-year deadline for issuing rules for what has become known as “Crowdfunding” of new companies, FINRA has proactively attempted to temporarily fill the regulatory void, by issuing a voluntary form for prospective funding portals.
A mandate for such Crowdfunding structures, aimed at increasing small business investment by easing securities regulations, was laid out in the Jumpstart Our Business Startups (“JOBS”) Act, signed into law in April 2012. According to George Smaragdis, FINRA’s Director of Media Relations, “FINRA is committed to ensuring that the capital-raising objectives of the JOBS Act are advanced in a manner consistent with Congressional intent and investor protection.”
Those who intend to launch such a portal — which would offer equity in return for individual investments in start-up companies — can use the form to voluntarily submit information to FINRA that will assist FINRA in its understanding of and rulemaking efforts related to Crowdfunding and funding portals.
Debate continues to rage about the potential value of expanding Crowdfunding into the world of issuing securities. The technique has been explosively popular for the funding of charitable endeavors or artistic projects, and many start-ups have used it to draw funding for individual project development — in some cases, to jaw-dropping success. But the use of Crowdfunding for securities is seen by many as a source of enormous regulatory problems and potential for fraudulent activities. As a result, much consideration is being given to understanding the funding portal business model in anticipation of new forthcoming rules and regulations.
FINRA’s new form asks applicants to disclose several items, including information about the principals in the portal and whether they have been accused of securities violations or serious crimes. The form also asks prospective portals for information regarding its ownership, funding, management, business model and relationships.
The information provided at this early stage will not be binding. FINRA has indicated that information voluntarily provided regarding portal business models will be accorded strict confidence and provide helpful insights toward a better understanding of the funding portal community in its efforts to develop rules specific to funding portals. Once the SEC has adopted funding portal rules, FINRA says it will issue a final funding portal application for FINRA regulation.
ADDITIONAL GUIDANCE FROM COMPLIANCE ADVISERS
If you intend to act as a Funding Portal under the JOBS Act, contact us for Guidance regarding submission of the Interim Funding Portal Form and registration with FINRA as a Funding Portal.