Earlier this month, CI reported on the Association of Online Investment Platforms (AOIP) – the group that advocates on behalf of platforms raising capital online – submitting recommendations to FINRA regarding a request for feedback on improving capital formation.
FINRA [Financial Industry Regulatory Authority] is the self-regulatory organization that represents the more than 620,000 Broker-Dealers and Funding Portals operating in the US. FINRA kicked off the initiative this past May, seeking ways to increase efficiency and reduce unnecessary burdens on the capital-raising process. FINRA stated at that time that “an efficient capital raising process fosters business expansion, job creation, and economic growth.” As the US is in the midst of a slowing economy and risk capital has slowed dramatically, now is a good time to consider policies that help entrepreneurs and early-stage firms.
AOIP submitted several recommendations but emphasized the need to improve Regulation A or Reg A+. This securities exemption is a top crowdfunding path that enables firms to raise up to $75 million, catering to both accredited and non-accredited investors. One suggestion was to speed up the approval process for an issuer to offer securities under Reg A. Currently, it can take many months for an offering to be qualified which could undermine the viability of a firm in need of cash.
But what other recommendations did FINRA receive from other interested parties?
While there were not many comments, below are some other suggestions from firms engaged in the capital formation sector.
CrowdCheck, founded by Sara Hanks – a securities crowdfunding OG – shared their feedback on two issues: “(1) the changes that have occurred in early-stage capital formation, both in the types of offering that may be made and in the services that issuers need to raise capital in modern offerings; and (2) the timeliness of FINRA’s 5110 review process.”
In parallel to comments submitted by the AOIP, Crowdcheck expressed concern with the extensive delay of Reg A approvals:
“Our other major concern with respect to FINRA’s role in Regulation A transactions is the time is takes to get a “No Objections” Letter. We have been involved in several transactions where the SEC has no further comments and the transaction has not been cleared by FINRA, even when the underwriting arrangements are with the same FINRA member firm and are no different than in previous deals with the same member. These delays have caused our clients, which are generally small companies with limited resources, significant problems. While waiting for clearance, audit opinions and even the issuers’ entire financial statements became “stale” and required additional filings with the SEC. Further, in some instances, the issuer has lost access to favorable timing windows for their offering. These were significant harms caused by delays during the FINRA review, without meaningful benefits or protections provided to the issuers or investors because the terms were substantially the same as terms that had been cleared by FINRA in prior circumstances with the same FINRA member firm.”
In regard to the first issue, CrowdCheck noted that online securities offerings are very different from the previous, more analog processes. Rules have not changed to reflect this fact. CrowdCheck noted that securities offerings are now technology-driven, and “many of the services necessary for online capital formation (publicity services, payment processes, and analytics, for example) did not exist when FINRA’s fee structure was developed.” The fee structure needs to reflect the new digital reality as services are more advanced today than in the not-so-distant phone call past.
OTC Markets, a securities marketplace that includes 1500 small-cap firms, asked FINRA to “update guidance that clarifies broker-dealers’ compliance obligations with respect to clearing, depositing, and facilitating transactions in unregistered securities.”
“Updated regulatory guidance would allow for more privately issued securities to enter the public market,” said OTC Markets.” OTC believes that due to the opaque nature of regulation, many brokers believe it is cost prohibitive to facilitate transactions for retail investors, which causes several related issues, such as a lack of liquidity and more difficulty to raise capital from new investors.
GVC Capital criticized the entire environment of capital formation as “remarkably complex” and excessively difficult to navigate for all stakeholders involved. While acknowledging the need for a balanced approach that incorporates investor protection, these complexities “endure and hinder capital raising efforts.”
“FINRA (and/or the SEC and/or the states) should evaluate, harmonize, and improve in the contexts of capital raising transactions the definitions, e.g., of “accredited investor,” “retail investor,” “institutional investor,” “retail communication” and “institutional communication.”
And;
“At present, and as referenced above, there is a crazy quilt legal and regulatory environment of overlapping, distinct, and/or contradictory or inconsistent laws, rules and regulations impacting capital formation. For example, sometimes federal law preempts state law and sometimes it does not.”
During the last administration, the SEC attempted to harmonize some rules with some success but then arrives the next administration that aims to muck things up further with cumbersome and obtuse rules.
Only one comment letter opposed improving access to capital and the private capital markets – effectively a statement advocating anti-capital formation.
PIABA, or the Public Investors Advocate Bar Association, told FINRA to leave things alone as there are too many private offerings and the increasing pool of accredited investors means that there are more investors lacking the sophistication to understand the risk adequately. “We find this trend concerning,” stated PIABA. Perhaps PIABA would prefer if the US was a command economy.
All of the comment letters are available here.