While the provisions of the Jumpstart Our Business Startups Act, commonly known as the “JOBS Act,” to enable capital-raising by crowdfunding await the required rulemaking by the Securities and Exchange Commission, it has been interesting to read about the recent efforts of a relatively new organization, Crowdfund Intermediary Regulatory Advocates, or “CFIRA,” to influence the rulemaking by the SEC and the Financial Industry Regulatory Authority, or “FINRA,” the SEC-approved self-regulatory organization for securities brokers and dealers.
As noted in a previous post, the passage of the JOBS Act offers the promise that small businesses will be able legally to raise a limited amount of equity and debt capital under the securities laws by crowdfunding. Those provisions of the JOBS Act were intended to address the need for capital formation by smaller growing businesses, which would, it was hoped, cause general economic growth. Those provisions amended certain federal securities statutes but still require amendments to various SEC rules. Section 302(c) of Title III of the JOBS Act specified that such rulemaking must be completed by about January 1, 2013, though in light of the SEC's heavy workload and its history in adopting other rules required by the JOBS Act, it would be understandable if such rulemaking were delayed. Also, a condition to the use of crowdfunding to raise capital is the use of either a broker-dealer registered with FINRA or a “funding portal” that will be required to register with the SEC and become a member of a “national securities organization” under some rules yet to be promulgated. Because the only existing national securities association is FINRA, the rules or regulations of FINRA are also likely to be critical to the development of capital-raising crowdfunding.
It is therefore interesting that CFIRA was formed and is focusing not on encouraging public or Congressional support, but on the development of the regulatory system, for capital-raising crowd funding. CFIRA describes itself as “an organization formed by the crowdfunding industry's leading platforms and experts” to “work with” the SEC, FINRA, and other “governmental and quasi-governmental entities to help establish industry standards and best practices.”
CFIRA has recently submitted letters of comment to the SEC regarding the proposed use of general solicitation in an exempt Rule 506 offering under Regulation D and to FINRA regarding suggestions for certain rules to govern intermediaries for capital-raising crowdfunding. Those letters appear to reflect that CFIRA appreciates the kinds of amendments to current SEC and FINRA rules that will be required and is advocating rule changes not blindly, but with the understanding that the investor protection-function of securities laws and FINRA rules is important, even in the context of capital-raising crowdfunding.
OUR TAKE: The emerging activity of CFIRA during the rulemaking process to permit crowdfunding for raising capital appears to be positive, and it will be interesting to see if CFIRA plays an influential role in the development of the regulatory system.