FINRA Takes a Small and Extremely Tentative Step Towards Implementing Crowdfunding

Many entrepreneurs have been growing increasingly impatient with the SEC. Not only is the SEC about to be 6 months late in implementing the loosening of the general solicitation requirement of Regulation D, which was mandated by the JOBS Act, but it is now nearly certain that the SEC will also miss its deadline to issue regulations to implement the crowdfunding provisions of the JOBS Act as well. Under the JOBS Act, the SEC was given until January 2013 to issue the implementing regulations and since the new year is right around the corner, and we haven’t even seen proposed regulations, we know it will be a long time until the regulations are finalized and companies can begin to use the new crowdfunding exemption. That said, on December 7, a small step was taken towards implementing the crowdfunding law.

The step wasn’t taken by the SEC; instead it was taken by FINRA. FINRA is a private regulatory body that acts as the primary regulator for broker-dealers (i.e. brokers of securities). While broker-dealers must register with the SEC (and state securities regulators), the Securities Exchange Act of 1934 also requires broker-dealers to join a “self regulatory organization” (a.k.a. an SRO). There is only one SRO for ordinary broker-dealers: FINRA. Thus FINRA has become the de facto privatized regulator of broker-dealers.

Under the JOBS Act, all crowdfunding offerings must be undertaken through a “funding portal” and these funding portals must be a member of an SRO. The practical effect of this is that every website that conducts crowdfunding offerings will need to be a member of FINRA.

On December 7, the FINRA board of governors authorized FINRA to issue an interim form to begin gathering information from prospective funding portals that intend to apply for membership with FINRA. Presumably, once this form has been finalized, funding portals can begin to get a head start on their membership process (which any owner of a broker-dealer can tell you is quite arduous).

This may not sound like much — and frankly, it isn’t, but it gives hope to those eagerly awaiting progress on crowdfunding.


© 2012 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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Alexander J. Davie

Alexander J. Davie

Alexander Davie is a corporate and securities attorney based in Nashville, Tennessee. Businesses of many varieties rely on his counsel and judgment throughout all stages of their growth. In particular, fund managers and investment management professionals seek the expertise Alex gained when he served as general counsel to a private investment fund. Alex also has significant experience and enjoys working with companies and entrepreneurial ventures, especially within the technology industry. As a believer in technology's ability to enrich people's lives and allowing people to connect with each other in new ways, he is passionate about helping tech startups achieve success. He is active in Nashville's startup community as a mentor at the Nashville Entrepreneur Center and participates in numerous other events geared towards making Nashville a nationally ranked location for starting a business.

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