The Association of Online Investment Platforms (AOIP) provides feedback on FINRA’s request for input on improving capital formation.
This past May, FINRA announced a request for comment on how FINRA rules may impact capital formation. The goal was to look for ways to increase efficiency and reduce unnecessary burdens on the capital-raising process. The deadline for comments was earlier this month on August 7, 2023.
To quote the regulatory notice:
“An efficient capital raising process fosters business expansion, job creation, and economic growth. FINRA members play an important role in facilitating capital formation for businesses of all sizes. FINRA promotes the capital raising process through appropriately tailored rules for its members that are designed to promote transparency and to establish important standards of conduct for the benefit of all market participants, including investors and issuers.”
FINRA asked if there are any “FINRA rules, operations or administrative processes that should be updated or amended to better facilitate capital raising,” while ensuring investor protection.
The Association of Online Investment Platforms (AOIP) has taken the opportunity to make some recommendations to FINRA as to how they may improve online capital formation.
In a comment letter, AOIP asked FINRA to increase the funding cap under Reg A+ (Regulation A) from its current $75 million maximum amount. AOIP recommended an increase to $150 million, stating that a higher funding cap would “continue to attract high-quality issuers.”
At the same time, the AOIP pointed to the current complexity and cost of Reg A+ that is based upon a “30 year old Fee model that did not take into consideration the internet – and hence online capital formation.
The Association stated:
“Continuing to support the Fee Model, which is not reflective of today’s vastly different services model, has two systemic negative impacts on the space. First, it discourages technology development, raising the cost of capital for issuers and impeding innovation. Second, the fee caps make it difficult or impossible for licensed broker-dealers to offer blended services—which ultimately pushes activity to non-regulated parties, which are under much less regulatory scrutiny and therefore, may act with less care and compliance.”
The comment letter outlined changes that have taken place in regard to online capital formation and how platforms and issuers are adapting.
Finally, the Association asked for the streamlining of Rule 5110 review burden.
This references the challenges in having a Reg A+ offering approved, which may take many months. The Association explained:
“The lengthy process also makes it more difficult for investors to find small business investment opportunities, while applications are “pending” with FINRA. Furthermore, it also places an undue burden on issuers who cannot reasonably predict when they will be able to have access to funds. For early or growth stage issues, these delays can be catastrophic. Most equity-based crowdfunding offerings are made by relatively young companies; over 60% of companies making an offering were less than five years old at the time of their offering;a delay of 5 months can mean life or death of that prospective issuer company.”
Several AOIP members commented on the comments submitted by the Association. Bill Clark, founder and CEO of MicroVentures, a Broker-Dealer enabling online capital formation, shared:
“Online capital formation or securities crowdfunding is now big business. Private firms are raising billions of dollars every year by utilizing Funding Portals or Broker-Dealers. The Association of Online Investment Platforms was created to advocate on behalf of these platforms, as well as to ensure the industry remains viable. This means platforms must be able to raise the capital needed for private firms, investors have the opportunity to participate in promising private firms, and the platforms are able to generate a profit. Our most recent comment letter addressed to FINRA outlines current needs for the industry to operate more effectively. We hope that FINRA, as well as other industry participants, support our recommendations.”
Ken Nguyen, founder and CEO of Republic, said the members of the Association of Online Investment Platforms are all committed to contributing regulatory perspectives for regulatory improvements that may be needed to catalyze growth and integrity in our industry.
“Our comprehensive proposal outlines crucial updates to the 30+ year-old fee models, current allowable offering size, and Rule 5110 review processes. We believe modernizing these aspects will drive innovation, bolster investor safeguards, and forge a vibrant future for digital investing.”
Mat Goldstein, Managing Principal, DealMaker Securities, said that the members of AOIP know how complex and challenging it can be for issuers to navigate the world of online capital formation.
“We are here to help. The fact that FINRA is taking input from the market leaders in Reg A capital raising is encouraging for all of us who have high aspirations for the growth of the US capital markets – the world’s largest and most retail-friendly of all capital markets. Together, we can continue to bring innovation and advanced technology to this hugely impactful space.”
Since its formation, AOIP has visited with policymakers in Washington, DC, to advocate on behalf of the industry. As FINRA stated in the request for comments, a vital component of economic growth is the ability of businesses of all sizes to raise capital efficiently. This is a theme that should garner broad support regardless of affiliation.
Last month, the AOIP submitted a separate letter to Congress asking Representatives and Senators to push forward on pending legislation designed to boost entrepreneurship, and access to capital, which will, in turn, generate jobs and economic growth.
The AOIP Letter to FINRA is available here and below.