JOBS Act Equity Crowdfunding Rules Take Effect in May

JOBS Act Equity Crowdfunding Rules Take Effect in May

The Securities and Exchange Commission’s (SEC) equity crowdfunding rules are scheduled to take effect in May. In the meantime, the SEC and the Financial Industry Regulatory Authority (FINRA) are clearing the way for funding portals to start operating. In January, the SEC approved FINRA’s Funding Portal rules and related forms.

Funding Portals Under the JOBS Act

As previously discussed, the JOBS Act authorized everyday citizens (non-accredited investors) to participate in equity crowdfunding. Once the SEC’s final rules take effect, start-ups and growing ventures will be permitted to solicit investments from “everyday” investors using the Internet.

Crowdfunding transactions must take place through an SEC-registered intermediary, which can be either a broker-dealer or a funding portal. Under the JOBS Act, funding portals relying on the crowdfunding exemption must register with the SEC and become a FINRA member. The statute further specifies that a funding portal may not: (1) offer investment advice or recommendations; (2) solicit purchases, sales, or offers to buy the securities offered or displayed on its website or portal; (3) compensate employees, agents, or other persons for such solicitation or based on the sale of securities displayed or referenced on its website or portal; (4) hold, manage, possess, or otherwise handle investor funds or securities; or (5) engage in such other activities as the SEC, by rule, determines appropriate.

FINRA’s Crowdfunding Rules

FINRA Funding Portal Rules are a “light” version of the general standards that apply to traditional brokers. Below is a brief summary of the seven crowdfunding portal rules approved by the SEC:

• Funding Portal Rule 100: This rule sets forth basic standards and definitions for purposes of the Funding Portal Rules.
• Funding Portal Rule 110: This rule establishes the membership application process (MAP) for funding portals, which includes submitting Form FP-NMA. Information that must be submitted includes whether the applicant or any associated person is subject to a statutory disqualification. The application fee is $2,700.
• Funding Portal Rule 200: This abbreviated conduct rule prohibits a funding portal member from effecting any transaction in, or inducing the purchase or sale of, any security by means of, or by aiding or abetting, any manipulative, deceptive or other fraudulent device or contrivance. It also prohibits the use of false and misleading statements.
• Funding Portal Rule 300: This streamlined supervision rule requires each funding portal member to establish and maintain a system to supervise the activities of each associated person of the funding portal member that is reasonably designed to achieve compliance with applicable securities laws and regulations, including the Funding Portal Rules.
• Funding Portal Rule 800: This rule provides that funding portal members are subject to FINRA’s rules regarding investigations and sanctions. It also states that FINRA may provide access to the public, via an appropriate link on the FINRA website, to a funding portal member’s current SEC Form Funding Portal.
• Funding Portal Rule 900: This rule states that funding portal members are subject to FINRA’s Code of Procedure, unless the context requires otherwise.
• Funding Portal Rule 1200: This rule confirms that funding portals are subject to FINRA’s code of arbitration and mediation procedures, as well as addresses the use of pre-dispute arbitration agreements for investor accounts.

The full funding portal rules are available on the FINRA website along with all of the applicable forms. Given the novelty and complexity of the registration process, prospective crowdfunding portals should consult with an experienced business attorney.