Corporate Finance & Securities

Board Authorizes FINRA to Publish Regulatory Notice on Proposed Rules

Last week, the Board of Governors met and authorized FINRA to publish a Regulatory Notice to solicit comment on proposed rules and related form changes for funding platforms pursuant to Title III of the JOBS Act.

The proposed rules will address, among other things, the funding portal membership application process, fraud and manipulation, just and equitable principles of trade, and communications with the public. FINRA expects to publish its proposed rules around the same time the SEC publishes its rules on Title III, which is expected to happen later this year.

FINRA also moved forward with a rule proposal to make Rule 144A deals subject to dissemination under the FINRA rules. Check out the proposed rule change here.

Stay tuned! We’ll keep you...

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Corporate Finance & Securities

When are FINRA Members Subject to the Arbitration Provisions of FINRA’s Customer Code?

The United States Court of Appeals for the Fourth Circuit has issued a trio of opinions in 2013 which determine the scope of FINRA’s customer code. The customer code allows customers of FINRA members to initiate arbitration proceedings against a FINRA member.

Background FINRA is a private self-regulatory organization that has the authority to exercise comprehensive oversight over all securities firms that do business with the public.

FINRA’s Customer Code governs arbitration between customers of FINRA members and FINRA members. (There is also an Industry Code which governs disputes between FINRA members.)

Rule 12200 provides that parties must arbitrate a dispute under the Customer Code if: (1) Arbitration under the Code is either: (a) required by a written agreement, or (b) requested by the customer; (2) the dispute is...

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Corporate Finance & Securities

NASAA to Investigate Further into Early Crowdfunding Platforms Jumping the Gun

I read a Wall Street Journal article today about the recent investigation into websites claiming to be crowdfunding platforms. Of the reported 9,000 websites that contain the word “crowdfund” in their website names, the North American Securities Administrators Association (NASAA)—the organization that represents state securities regulators—has investigated roughly 2,000, and plans to give a closer look at 200 of those.

Why the investigation in the first place? Well, many securities regulators are concerned that the “relaxed” rules governing securities offerings for private companies might present an opportunity for fraud. NASAA has decided to look further into these crowdfunding sites in an effort to reduce the likelihood of fraud and crack down on those companies that have jumped the gun on crowdfunding...

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Corporate Finance & Securities

SEC Releases Financial Report; Signals “Quick, Pragmatic” Implementation of JOBS Act in 2013

The Securities and Exchange Commission (SEC) released its annual financial report recently. At various points throughout the report, the SEC notes that it has worked and will continue to work to implement the JOBS Act in a quick, pragmatic manner.  Also, the report points out that the SEC will attempt to maintain the congressional intent behind the Act in its rulemaking.

The Commission stated in its Management Discussion and Analysis report that it will work to implement the JOBS Act in a “practical manner that reflects the entrepreneurial dynamics of the digital age.” Our interpretation: The SEC will attempt to tailor the rules in a way that recognizes the importance of modern technology’s impact on the private placement markets. The SEC also...

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Corporate Finance & Securities

FINRA Issues Voluntary Form for Crowdfunding Portals

Last week we wrote about the Financial Industry Regulatory Authority (FINRA) announcing the creation of a form for prospective funding portals. Just one week later, FINRA has issued the voluntary interim form for funding portals, which is designed to collect information from prospective crowdfunding portals under the JOBS Act. Those prospective funding portals may voluntarily submit information about their company, and FINRA will use the information it receives to develop rules specific to the regulation of crowdfunding portals.

Once FINRA and the SEC adopt funding portal rules, FINRA will create and issue a funding portal application. The interim form asks the funding portals for information regarding: ownership, funding, management, and business model and relationships.

It will be interesting to see how many prospective funding...

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Business Startup

Slower Than Expected: A Look Into the Timeline for Implementing the JOBS Act

Flashback to April 5, 2012: President Obama puts pen to paper and signs the Jumpstart Our Business Startups Act (the JOBS Act). The President declares that startups and small businesses will “now have access to a big new pool of American investors—namely the American people.” Entrepreneurs rejoice as the potential impacts of this bill could be huge for startups and small businesses. The bill provided a framework and the SEC was handed the reins to draft rules that would govern much of new legislation. The SEC was given a 90-day deadline to implement the JOBS Act.

Flash forward more than 9 months (roughly 270 days later) to January 9, 2013: The SEC has yet to finalize the rules governing the JOBS...

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Corporate Finance & Securities

FINRA Authorizes Collection of Information from Funding Platforms

The frustrations have been loud and clear from funding platforms, investors, and bloggers alike regarding the SEC’s failure to implement rules governing online fundraising under the JOBS Act. The SEC has been dragging its feet and has missed just about every deadline that was set for it to enact the regulations that will allow investors and fundraisers to connect via online funding portals. However, in early December FINRA took a small step in the right direction.

The FINRA Board of Governors met to discuss a number of regulatory issues, including funding portals and the JOBS Act. The result? The Board authorized FINRA to create a form that is geared towards obtaining information from funding platforms that are intending to register with...

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Business Startup

FINRA Fines NEXT For Inadequate Private Placement Due Diligence

The Financial Industry Regulatory Authority (FINRA) fined NEXT Financial Group for failing to perform reasonable investigations during the due diligence phase of the private placement offering by Provident Royalties. As a result of NEXT’s failure, investors lost hundreds of millions of dollars. NEXT will pay a $50,000 fine and $2 million in restitution to its clients. Furthermore, the SEC has accused Provident of committing fraud, and as least one of Provident’s brokers has admitted to these allegations.

As we discussed last week, due diligence requires a reasonable investigation of all the “material” facts before entering into any agreement with another person or entity. Due diligence is required and regulated in order to prevent unnecessary harm to investors. Typically, a broker is...

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Corporate Finance & Securities

Changes On the Horizon for Filing Private Placement Memoranda

Beginning on Monday, December 3, 2012, members of Financial Industry Regulatory Authority (FINRA) must file a copy of any private placement memorandum, term sheet, or other offering document used within 15 calendar days from the date the sale took place; the filer will have a continuing obligation to file any materially amended versions of the offering documents; if no offering documents are used, it must indicate that it did not do so; and filings must be made electronically with FINRA through the FINRA Firm Gateway.

FINRA has taken active steps to increase transparency and investor protection in private placements. In addition to the Rule 5123 filing requirements, Rule 5122 establishes standards on disclosure, use of proceeds, and a filing requirement for...

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Corporate Finance & Securities

FINRA Guidance for Private Placement Due Diligence

If you’ve been following securities regulation over the past three years, you’ve likely noticed the increased FINRA scrutiny on private placement due diligence. Especially with respect to broker-dealers, the Financial Industry Regulatory Authority has cracked down on numerous firms that fail to take reasonable steps to investigate issuers before recommending an issuer’s securities to the broker-dealer’s  clients. There is the potential for an increase in private placements due to the recent legislation passed, the JOBS Act. Today’s post revisits some of the best practices that FINRA suggested in its Regulatory Notice 10-22, released in April 2010.

Reasonable Investigation Depends on the Circumstances In general, broker-dealers are required to perform a reasonable investigation concerning the issuer and its management, the business prospects of...

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