Although Finra's campaign to take on investment adviser oversight has fostered a huge debate, scant attention has been paid to the regulator's unchallenged position as the only body able to oversee new portals for so-called crowd funding created under the JOBS Act.
In the latest development, the Financial Industry Regulatory Authority Inc. this month asked for comment on what rules it should adopt to regulate websites that help small businesses raise capital.
The Securities and Exchange Commission has also been taking comments on related rule making, with a formal proposal due by the end of the year.
Thus far, there are about 150 crowd-funding sites worldwide that are operational “or seriously in the works,” said David Marlett, executive director of the National Crowdfunding Association.
The sites raised about $1.5 billion last year and could take in twice that this year, he said.
The JOBS Act, among other things, exempts from registration securities offerings of up to $1 million annually when sold to small investors through online portals.
Unlike the fervid debate surrounding Finra's effort to expand its turf into the investment adviser arena, the discussions so far about how to regulate portals have been downright gentlemanly.
Things could still get tense, however. Historically, Finra and state regulators have favored relatively strict rules for investor protection.
The nascent crowd-funding industry, by contrast, wants a lighter touch. It has allies in Congress, which included in the JOBS Act provisions intended to support entrepreneurship.
By the same token, the law prohibits sites for crowd funding from soliciting transactions, giving investment advice, paying representatives for solicitations or sales, or handling customer funds.
After flirting with the idea of starting their own self-regulatory organization, such sites have come to the conclusion that Finra indeed will become their industry's regulator.
Not that there was ever much doubt.
Finra is the only entity to qualify as a self-regulator under the JOBS Act, which requires portals to register with a national securities association as defined in the Securities Exchange Act of 1934. Finra is the only such association in existence.
Portals also will have the option of registering as broker-dealers and becoming regular Finra member firms.
About Finra as a self-regulator, “we're happy with that. We find them very engaged,” said Freeman White, chief executive of the portal site Launcht and an executive committee member of the CrowdFund Intermediary Regulatory Advocates, an advocacy group.
“Who else could do it?” asked Arkansas securities commissioner Heath Abshure, who heads the North American Securities Administrators Association Inc.'s efforts at influencing JOBS Act rule making.
In its notice this month, Finra indicated that it had been given the go-ahead by the SEC.
“We have had conversations with SEC staff suggesting that Finra should consider adopting ... crowd-funding rules,” the notice said.
It is anyone's guess what sort of portal rule book Finra will come up with — perhaps something close to a full broker-dealer-type regulation scheme or, alternatively, a stripped-down structure that for discussion purposes has been dubbed “B-D lite.”
Under the law, regulators are restricted to enforcing rules written specifically for portals.
Finra spokeswoman Michelle Ong declined to comment.
“We will look to B-D regulations to inform [not dictate] the ultimate rule making for portals,” SEC spokesman John Nester wrote in an e-mail.
The crowd-funding industry expects a regime that is streamlined compared with full-blown broker-dealer rules, Mr. White said.
Regulators could develop original standards or “take the broker-dealer standards and start shaving off parts,” he said.
In its regulatory notice, Finra asked about possible rules for covering the supervision of portals, including ones covering advertising, money laundering, fraud and manipulation, and just and equitable principles of trade.
Finra also asked whether existing rules should be relaxed for a broker-dealer's separate crowd-funding activities. It wants comments by Aug. 31.
State regulators are worried about the possible development of a two-tier regulatory scheme exempting portals from many existing investor protection rules while maintaining regulation on broker-dealers.
Portals “will not be held to traditional suitability and know-your-customer standards,” NASAA said in a letter to the SEC.
NASAA would prefer to see portals regulated like broker-dealers.
“Congress legislated a role for these [crowd-funding] intermediaries, and it's important to have some strict standards and the liability” on portals to ensure compliance, Mr. Abshure said. “With a full-blown broker-dealer, you have that.”
Crowd-funding portals aren't worried yet about Finra imposing a fat rule book.
“That certain preconceived notion of the heavy-handed regulator hasn't been present in this case,” said Vince Molinari, chief executive of portal and technology provider GATE Technologies LLC and co-chairman of the CFIRA.
Regulatory costs will be an issue, Mr. Molinari said,
“But having an SRO govern this space is going to help it grow in a very responsible way,” he said.
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