SEC Approves FINRA Rule 4518

By Geoff Hafer, Spring 2016 Student Intern

FINRA Rule 4518 “applies to registered broker-dealer members of FINRA that contemplate acting as intermediaries in transactions involving the offer or sale of securities pursuant to the crowdfunding provisions of Title III of the JOBS Act and the SEC’s Regulation Crowdfunding.”

Well, that certainly sounds nice but what does all of that mean?

First, what is the JOBS Act?

The Jumpstart Our Business Startups Act or JOBS Act was signed into law by President Barack Obama on April 5, 2012 and was intended to encourage funding of United States small businesses by easing various securities regulations.

Okay that makes sense now what about crowdfunding provisions of Title III of the JOBS Act?

Crowdfunding generally refers to the use of the Internet by small businesses to raise capital through limited investments from a large number of investors. Title III essentially expands equity crowdfunding to include non-accredited investor participation. The limits are $2,000 or 5% (whichever is greater) for people earning (or worth) up to $100,000, and $10,000 or 10% (whichever is less) for people earning (or worth) $100,000 or more. This marks the first time in over eighty years that everyday citizens will have access to investing in early stage companies.

What about the SEC’s Regulation Crowdfunding?

Consistent with Title III of the Jobs Act, the proposed rules would require companies conducting a crowdfunding offering to file certain information with the SEC, provide it to investors and the relevant intermediary, and make it available to potential investor. Some of the things the company would be required to disclose include: a description of the company’s business and the use of proceeds from the offering, a description of the financial condition of the company, information about officers and directors as well as owners of 20 percent or more of the company, and financial statements of the company. Broker-dealer members should note that the effective date for Regulation Crowdfunding is May 16, 2016.

So finally, where does FINRA Rule 4518 come into play?

FINRA Rule 4518 became effective on January 29, 2016. In anticipation that registered broker-dealer members of FINRA may intend to act as intermediaries for transactions in connection with the crowdfunding exemption, FINRA adopted Rule 4518. The rule provides that a FINRA member shall notify FINRA:

  • Prior to engaging, for the first time, in a transaction involving the offer or sale of securities in reliance on the crowdfunding exemption; or
  • Within 30 days of directly or indirectly controlling, or being controlled by or under common control with, a funding portal as defined pursuant to Rule 300(c)(2) of SEC Regulation Crowdfunding.

So it has finally all come together. It is particularly important to note that once again although members may begin to notify FINRA now, as set out in Rule 4518, the effective date for Regulation Crowdfunding is May 16, 2016.