Regulatory Notice: FINRA Asks for Comments on Capital Formation Including Crowdfunding & More

The Financial Industry Regulatory Authority (FINRA) has filed a regulatory notice and a request for comments regarding capital formation. The review includes aspects of the JOBS Act and crowdfunding. FINRA said the request for comments was part of its FINRA360 initiative, a comprehensive review of its operations and programs initiated by its new CEO following years of grumbling by FINRA members and the regulator’s heavy-handed approach.

FINRA President and CEO Robert Cook stated;

“A vibrant capital-raising process supports the growth of the large and small businesses that create jobs and strengthen the economy. Broker-dealers perform a critical role in that process. As the environment for capital raising evolves, it is essential that we continue to assess how regulation can best facilitate capital formation on a strong foundation of investor protection and market integrity.”

Three separate regulatory notices were released including:

  • Regulatory Notice 17-14 requests comment on all of FINRA’s existing rules, operations and administrative processes that address the capital-raising activities of its member firms, including recent additions regarding capital acquisition brokers and funding portals. The Notice is part of the new FINRA360 initiative, in which FINRA is conducting a comprehensive review of its operations and programs.
  • Regulatory Notice 17-15, requests comment on proposed amendments to modernize, simplify and clarify FINRA Rule 5110. The rule applies to underwriting terms and arrangements regarding the public offering of securities.
  • Regulatory Notice 17-16, which clarifies the application of FINRA’s research rules to desk commentary by sales and trading and principal trading personnel and solicits comments on a proposal to create a limited safe harbor for eligible desk commentary that may rise to the level of a research report. The proposed safe harbor would be subject to a number of compliance conditions to mitigate research-related conflicts.

Regarding “funding portal rules”, FINRA posted:

The JOBS Act contains provisions that permit businesses to offer and sell securities through crowdfunding.12 Funding portals that engage in crowdfunding on behalf of issuers must become a member of a national securities association.13 Under the JOBS Act and the SEC’s Regulation Crowdfunding, a funding portal may 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) handle investor funds or securities; or (5) engage in such other activities as the SEC, by rule, determines appropriate. FINRA’s Funding Portal Rules are streamlined specifically for funding portals and to reflect the limited scope of activity permitted by funding portals while also maintaining investor protection. In addition, the notice requirements of FINRA Rule 4518 enable FINRA to keep track as to which of its members are engaging in crowdfunding activity.

Regarding the request for comments under Regulatory Notice 17-14, FINRA is specifically looking for comments on the following:

1. Have FINRA’s rules covering the capital-raising process effectively responded to the problem(s) they were intended to address?

2. What have been the economic impacts, including costs and benefits, arising from FINRA’s rules on the capital-raising process? To what extent would these economic impacts differ by business attributes, such as size of the firm or differences in business models?

3. Where have FINRA rules around the capital-raising process been designed particularly effectively? Are there other rules or applications where this approach might enhance capital formation while maintaining investor protections?

4. What, if any, unintended consequences have arisen from FINRA’s rules related to the capital-raising process? How have firms limited or amended their business models and practices in ways unintended by FINRA with a consequence to capital formation or investor protection in order to comply with FINRA’s rules in these areas?

5. Are there other FINRA rules not identified above that impact the capital-raising process? If so, what has been your experience with these rules?

6. Are there any ambiguities in the rules that FINRA should address to aid firms’ compliance and enhance the capital-raising process while ensuring investor protection concerns are addressed?

7. Can FINRA make any of its administrative processes or interpretations related to the capital-raising process more efficient and effective? If so, which ones and how?

8. As currently designed, are the eligibility requirements for the CAB rules over- or under-inclusive in any respect? What changes, if any, to these requirements should be considered? Are the requirements applicable to CABs appropriately tailored to their business activities? Should any changes to these requirements be considered?

9. As currently designed, do FINRA’s funding portal rules appropriately address the requirements and objectives of the JOBS Act and the SEC’s Regulation Crowdfunding? What changes, if any, should be made to FINRA’s rules, and why?

Comments are due by May 30, 2017.

Comments must be submitted through one of the following methods: 0 Emailing comments to [email protected]; or Mailing comments in hard copy to: Jennifer Piorko Mitchell Office of the Corporate Secretary FINRA 1735 K Street, NW Washington, DC 20006-1506


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