Alert July 10, 2012

FINRA Requests Comment in Advance of Proposing Rules for Crowdfunding Intermediaries

FINRA issued Regulatory Notice 12-34 requesting comment concerning rule changes FINRA should consider for the regulation of crowdfunding intermediaries.  The crowdfunding provisions in Title III of the JOBS Act provide an exemption from registration under the Securities Act of 1933 for securities offered by issuers in amounts of up to $1 million over a 12-month period, provided that the conditions of the exemption are met.  An intermediary that seeks to engage in crowdfunding must be registered as a broker-dealer or a funding portal, a newly created type of entity.  The JOBS Act mandates that each registered funding portal be a member of an applicable SRO, but limits the examination and enforcement authority of the SRO over registered funding portals to rules “written specifically for registered funding portals.”

In response to a suggestion by the SEC staff that FINRA consider adopting its own crowdfunding rules, FINRA is requesting comment in advance of rulemaking.  FINRA notes that in writing rules for registered funding portals, it would seek to ensure that the capital-raising objectives of the JOBS Act are advanced in a manner consistent with investor protection.  Commenters are asked to identify the types of requirements that should apply to registered funding portals, with particular attention to possible rules concerning supervision, advertising, anti-money laundering, fraud and manipulation, and just and equitable principles of trade.

FINRA also seeks comment on how member firms that act as crowdfunding intermediaries should be regulated and whether rules currently applicable to member firms should be relaxed in connection with crowdfunding activities.  FINRA requests information about how crowdfunding activities are likely to be conducted organizationally – for example, whether they would be conducted by a department of the member firm or moved into a separate, unregistered entity.

Comments must be received by August 31, 2012.