The SEC has already missed its end-of-the-year deadline on laying down rules for so-called crowdfunding of new companies. But FINRA has jumped into the regulatory void, issuing a voluntary form for prospective funding portals.

Anyone who intends to launch such a portal -- which would offer equity in return for individual investments in start-up companies -- can voluntarily submit information to FINRA, which will help the regulator develop rules for crowdfunding portals, according to the authority.

A mandate for such crowdfunding structures, aimed at increasing small business investment by easing securities regulations, was laid out in the Jumpstart Our Business Startups Act, signed in April 2012 by President Obama.

“FINRA is committed to ensuring that the capital-raising objectives of the JOBS Act are advanced in a manner consistent with Congressional intent and investor protection,” FINRA’s director of media relations, George Smaragdis, said in an email.


Debate continues to rage about the potential value of expanding crowdfunding into the arena of issuing securities. The technique has been explosively popular for the funding of charitable endeavors or artistic projects, and many start-ups have used it to draw funding for individual project development -- in some cases, to jaw-dropping success. Since Kickstarter's founding in April 2009, more than 2.5 million people have pledged in excess of $350 million to fund more than 30,000 creative projects.

But many see the sale of crowdfunding for securities as rife with problems.

In a blog for the Harvard Business Review, Babson Global professor Daniel Isenberg called equity crowdfunding “fool’s gold.”

“[C]rowdfunding will at best be good only for the entrepreneurs and middlemen, paid for by unwitting consumers who simply cannot know enough about the highly risky ventures or the highly complex venture investing process to make informed investment decisions,” Isenberg wrote.

The government is inappropriately extrapolating from the success of crowdfunding for charitable, artistic and product development purposes to assume that equity crowdfunding can work as well, he says -- adding that the problem is that “crowds are stupid.”


The FINRA form asks applicants to disclose a number of things, including whether any of the principals in the portal have been accused of securities violations or serious crimes.

The information provided at this early stage will not be binding, however. FINRA says the authority will treat the information provided at this point as confidential.

The form also asks prospective portals for information regarding the portal's:

  • ownership
  • funding
  • management
  • business model and relationships.

Once the SEC has adopted funding portal rules, FINRA says it will issue a final funding portal application for FINRA regulation.
“Crowdfunding portals that file this form will provide FINRA with important information regarding portal business models, which will inform our rulemaking," Thomas Selman, FINRA’s executive vice president for regulatory policy, said in a statement.

Last year, FINRA solicited comments on the specific rules it should adopt for registered funding portals that become FINRA members.

FINRA has also asked for comment on the application of existing rules to broker-dealers engaging in crowdfunding activities.

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