Finra will be in charge of crowdfunding platforms

Prospect of regulation by brokers' regulator does not bother execs at existing sites

Oct 24, 2013 @ 3:03 pm

By Mark Schoeff Jr.

crowdfunding, finra, broker-dealers, JOBS act
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Usually the thought of Finra regulation sends a shudder through the target, but online platforms that will conduct equity sales in startup companies contend that they welcome the prospect.

The Financial Industry Regulatory Authority Inc. will oversee the portals under the Jumpstart Our Business Startups Act, which eases securities registration for small companies. On Wednesday, the Securities and Exchange Commission and Finra released proposed rules for implementing the so-called crowdfunding provision of the measure.

“Equity crowdfunding will not survive if there aren't rules to help protect both [issuers and investors],” said Ryan Caldbeck, co-founder and chief executive of CircleUp Network Inc., a crowdfunding site that focuses on consumer and retail companies. “Having a governing body overseeing those rules is positive for all the parties involved.”

Finra already regulates Mr. Caldbeck's site, which conducts equity crowdfunding for accredited investors. The rules that were proposed on Wednesday would extend access to crowdfunding to ordinary investors, who could buy equity offerings in small amounts.

“We've had a productive and positive relationship [with Finra],” Mr. Caldbeck said. “They're receptive to how we're trying to help investors and companies connect.”

Finra's regulation of crowdfunding portals will be less stringent than its oversight of broker-dealers, according to Robert Colby, the regulator's chief legal officer. Portals will not be allowed to engage in brokerage activities, such as soliciting investments, making recommendations or maintaining custody of client funds.

“This is one of our first efforts to create a slimmed-down rule book for a limited-purpose type of entity,” Mr. Colby said. “It is lighter than regulation of brokers consistent with what [portals] do.”

Finra will be monitoring the relationships between portals and brokers.

“We want to make sure the conduct stays in the right channels,” Mr. Colby said. “What I worry about is that in the go-go [online] environment, funding portals may not understand that they cannot go into full sales operations.”

MicroVentures, another crowdfunding site that works with accredited investors, has been overseen by Finra for the last three years. It has been examined twice by Finra in the past three years.

“It's never easy,” said Bill Clark, founder and president of MicroVentures. “They're very thorough. They follow up on everything. For us, it wasn't very painful. It's just time-consuming.”

He said that his portal has two full-time compliance officers and spends about $100,000 to $150,000 annually on ensuring that all regulations are followed.

Judd Hollas, founder and chief executive of Equitynet, said that he is not concerned about Finra regulation. But, he noted, it will pose a burden for new crowdfunding sites, most of which are small startups themselves.

“I'm assuming that a lot of crowdfunding operators would view regulatory oversight as an added challenge to their already full plates,” Mr. Hollas said. “It's certainly going to be a material cost in the tens of thousands of dollars at a minimum.”

Finra's more relaxed approach to this sector can be seen in part by the faster approval process for new portals than for new brokerages – 60 days compared to 180 days, according to Jilliene Helman, chief executive of Realty Mogul Co.

“It seems that their oversight of funding portals is going to be less onerous than their oversight of broker-dealers,” Ms. Helman said. “It suggests Finra understands how quickly things move in the tech world.”

Taking on regulation of crowdfunding portals won't distract Finra from its traditional broker-dealer constituency, according to Mr. Colby. The organization currently oversees about 4,200 securities firms. The SEC estimates that fewer than 100 crowdfunding portals will be operating when rules are approved. Finra has communicated with about 39 portals in a voluntary pre-registration initiative.

“If there are 50 to 100 portals, that's not a material change,” Mr. Colby said.

Mr. Clark said that he doesn't detect a culture clash between Finra and the online capital-formation community.

“The people I work with in [Finra's] Dallas district and in New York are open to crowdfunding, as long as they can have access to information they need to protect investors, which is the No. 1 goal,” Mr. Clark said.


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