FINRA’s Funding Portal Rules.
The federal crowdfunding final rules require that each intermediary in a crowdfunding transaction be registered with the Securities and Exchange Commission (“SEC”) either as a broker-dealer or a funding portal and be a member of the Financial Industry Regulatory Authority, Inc. (“FINRA”), which is currently the only registered national securities association. For details of the final rules, including registration and disclosure requirements for intermediaries, please see our previous series “Is It Time To Do Crowdfunding To Raise Money?: SEC Releases Federal Crowdfunding Final Rules.” FINRA has finalized its funding portal rules and the SEC approved them on January 29, 2016, making them effective as of that date.  The full text of FINRA’s funding portal rules is available here. #_ftn2 FINRA’s Regulatory Notice that provides an overview of the funding portal rules is available here.
For those who are not familiar with FINRA, part of its functions is to oversee firms and brokers that sell securities to the public in the United States. Although the funding portal rules appear to be loosely based on rules and regulations governing broker-dealers, they are written specifically for funding portals and have been streamlined to reflect the limited scope of activity permitted by funding portals. The FINRA rules consist of a set of seven rules, including the following:
- Rule 110 (Funding Portal Application): This rule sets forth the application process for a funding portal to become a member of FINRA, standards for granting or denying application, withdrawal or lapse of application, and appeals process, among other things. Of note, FINRA will determine whether the funding portal applicant is capable of complying with applicable federal securities laws, regulations, and FINRA rules; has established all contractual or other arrangements and business relationships with banks, broker-dealers, escrow/transfer agents, technology service providers, or others necessary to initiate the operation; and has an appropriate recordkeeping system, among other things.
- Rule 200 (Funding Portal Conduct): This rule requires a funding portal member to observe high standards of commercial honor and just equitable principles of trade and to avoid use of manipulative, deceptive, or other fraudulent devices, as well as false and misleading communications with the public.
- Rule 300 (Funding Portal Compliance): This rule requires a funding portal member to maintain a system to supervise its employees and activities, including written procedures and designated person to carry out the supervisory responsibilities. The rule also requires members to report certain information to FINRA, including any legal, regulatory, and administrative proceedings, violation of securities or similar laws, change in contact information, and statement of gross revenue.
- Rule 800 (Investigation and Sanctions): Under this rule, all funding portal members are subject to FINRA Rule 8000 Series applicable to broker-dealers, streamlined and with appropriate exceptions, regarding public disclosure of a funding portal’s current SEC Form Funding Portal on the FINRA website.
- Rule 900 (Code of Procedure): Similar to the above, under this rule, all funding portal members are subject to FINRA Rule 9000 Series applicable to broker-dealers, streamlined and with appropriate exceptions, regarding procedures for a person to become or remain associated with a funding portal member despite a statutory disqualification.
Additional information for funding portals, including how to register as a new funding portal, can be found on FINRA’s website.
As a reminder, a funding portal cannot: (i) offer investment advice or recommendations; (ii) solicit purchases, sales, or offers to buy the securities displayed on its platform; (iii) compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its platform; or (iv) hold, manage, possess, or otherwise handle investor funds or securities. The compliance guide clarifies that anyone who engages in any of these activities must act as a broker-dealer, rather than as a funding portal.
This post was the fourth part of a multi-part series on crowdfunding under the JOBS Act. You can find the other posts by searching our blogs at www.mcbrideattorneys.com. In our next post, we will discuss the recent legislative activity to bring about changes to the CROWDFUND Act.
This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein. This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. This article should not be treated as legal advice to any person or entity.
Steps have been taken to verify the contents of this article prior to publication. However, readers should not, and may not, rely on this article. Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.
About the Author
Shawn McBride is the Managing Member of The R. Shawn McBride Law Firm, PLLC, which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: (214) 418-0258; firstname.lastname@example.org, or www.mcbrideattorneys.com.
 See generally 81 Fed. Reg. 4931 (Jan. 28, 2016).
 See generally FINRA, Funding Portal Rules §§ 100 et seq. Unless otherwise noted, all references to the FINRA rules are from this citation.
 See generally FINRA, Regulatory Notice 16-06: SEC Approval of FINRA Funding Portal Rules and Related Forms (Jan. 29, 2016), http://www.lexissecuritiesmosaic.com/gateway/finra/regulatory-notices/Regulatory-Notice-16-06.pdf.
 Id. at 2.