Showing posts with label investor protection. Show all posts
Showing posts with label investor protection. Show all posts

Friday, November 1, 2013

SEC Proposes Rules on JOBS Act Crowdfunding Provisions

With constant advances in technology, crowdfunding has been a popular source used in a number of areas to raise money for various types of projects.  Its aim is to receive small contributions from a large amount of people.  Prior to the passage of the JOBS Act, this mechanism of raising capital was never used for the offer or sale of securities.  The crowdfunding exemption was intended to bridge the gap in raising funds and overbearing regulations for small businesses.    

The immediate concern for this type of fundraising is investor protection.  Thus, the SEC was tasked with formulating rules that allow for implementation of the crowdfunding provisions while safeguarding the market and investors.  Just recently, the SEC proposed rules that would “permit individuals to invest subject to certain thresholds, limit the amount of money a company can raise, require companies to disclose certain information about their offers, and create a regulatory framework for the intermediaries that would facilitate the crowdfunding transactions.”  Since the proposed rules encompass nearly 600 pages, the following is a brief overview of some of the important issues.  

According to the proposed rules, the maximum amount a company could raise from crowdfunding offering within a 12-month period is $1 million.  Over the course of the 12-month period, the maximum investment per investor is based on the annual income or net worth.  For investors with both an annual income and net worth less than $100,000, the maximum investment is the greater of $2,000 or 5% of their annual income or net worth.  For investors with either annual income or net worth equal to or more than $100,000, the maximum investment is 10% of their annual income or net worth, whichever is greater.  However, investors are not permitted to purchase more than $100,000 of securities through crowdfunding during the 12-month period.   

Companies conducting a crowdfunding offering are required to file certain information with the SEC.  This information is to be made available to investors, potential investors, and the intermediary facilitating the crowdfunding. Such information includes the following: (1) information about officers and directors as well as owners of 20 percent or more of the company; (2) a description of the company’s business and the use of proceeds from the offering; (3) the price to the public of the securities being offered, the target offering amount, the deadline to reach the target offering amount, and whether the company will accept investments in excess of the target offering amount; (4) certain related-party transactions; (5) a description of the financial condition of the company; and (6) financial statements of the company that, depending on the amount offered and sold during a 12-month period, would have to be accompanied by a copy of the company’s tax returns or reviewed or audited by an independent public accountant or auditor.  Any company relying on the use of crowdfunding to raise capital must file an annual report with the SEC and provide that report to investors. 

In order to achieve investor protection, the JOBS Act requires crowdfunding to take place through an SEC-registered intermediary.  This can be either a broker-dealer or a funding portal.  In a nutshell, the proposed rules would require intermediaries to take measures to reduce the risk of fraud, provide investors with educational materials and information about the issuer and offering, provide communications channels on the online platform that permit investors to discuss the offering, and facilitate the offer and sale of crowdfunded securities. The proposed rules prohibit funding portals from the following: (1) offering investment advice or making recommendations; (2) soliciting purchases, sales or offers to buy securities offered or displayed on its website; (3) imposing certain restrictions on compensating people for solicitations; and (4) holding, possessing, or handling investor funds or securities.

The SEC is providing 90 days of public comment before determining whether to adopt the proposed rules.  To review the proposed rules in their entirety, click here

Wednesday, January 9, 2013

FINRA’s 2012 Year in Review

FINRA just released its 2012 Year in Review Report.  In its opening remarks, FINRA’s Chairman and CEO, Richard Ketchum, stated, “FINRA fulfilled its role as the first line of defense for investors through a comprehensive and aggressive enforcement program, supported by a realigned and more risk-based examination program and the provision, for the first time, of cross-market surveillance programs that more effectively detected electronic manipulative trading. Protecting investors and helping to ensure the integrity of the nation’s financial markets is at the heart of what we do every day.


FINRA noted that one of its regulatory highlights was the success of its referral program in which the Office of Fraud Detection and Market Intelligence (“OFDMI”) shares regulatory intelligence with the SEC and other law enforcement agencies. Its intelligence stems from OFDMI’s fraud and insider trading surveillance of nearly all U.S. equities markets.  In 2012, FINRA referred a total of 692 matters to the SEC and other law enforcement agencies, of which 347 involved insider trading and 260 involved fraud. 

Disciplinary and Enforcement

In addition to its referrals program, FINRA brought 1,541 disciplinary actions against registered firms and individuals, levied fines in excess of $68 million, and ordered $34 million in restitution to harmed investors.  FINRA expelled a total of 30 firms from the securities industry, barred 294 individuals, and suspended 549 brokers from associating with FINRA-regulated firms. 

Some of the complex products involved in 2012 disciplinary and enforcement actions were non-traded REITs, exchange-traded funds (ETFs), and structured products.  Other enforcement actions involved research analyst conflicts, mispricing, and improper reimbursement fees to lobbying groups. 

Another critical aspect of FINRA is its examinations of member firms and associated persons.  In 2012, FINRA initiated 1,846 routine examinations, over 800 branch office examinations, and 5,100 examinations resulting from customer complaints, terminations for cause, and other regulatory tips.  FINRA’s exam procedures were made more efficient due to advances in technology which has provided FINRA with a modernized framework that allows it to identify and prioritize areas of risk exposure at firms. 

Investor Protection

Of grave importance to investors was FINRA’s new suitability rule that was implemented July 9, 2012.  The rule requires broker-dealers and/or their associated persons “to have a ‘reasonable basis’ to believe a recommended investment is suitable for the customer, based on information obtained through ‘reasonable diligence’ to understand a customer’s investment profile.”  For more investor information on FINRA’s suitability rule, click here.

FINRA also proposed an investor-protection initiative in 2012 that attempts to address conflicts of interest relating to recruitment compensation practices of member firms offering incentives to recruit registered representatives.  Currently these compensation arrangements are not disclosed to the representative’s customers when they are asked to transfer their accounts to a representative’s new firm.  The rule would require the member firm to provide certain disclosures before a customer makes the final determination to transfer an account to the new firm.  The view the text of the proposed rule, click here.

In September 2012, FINRA obtained approval to file proposed rules that would require firms to include a reference and a link to BrokerCheck on their websites to make it easier for investors to obtain information on firms and brokers. FINRA also increased the user friendliness of BrokerCheck by including a zip code search and a combined search function that provides for easier access to the SEC’s Investment Adviser Public Disclosure (IAPD) database. 

In November 2012, FINRA Dispute Resolution released data which reflects the outcomes of cases heard under its all-public panel program that was implemented in February 2011 which allows investors the option of a panel comprised of all public arbitrators versus a panel made up of one arbitrator with securities industry experience (nonpublic arbitrator) and two public arbitrators. The all-public panel option represents an investor-friendly change to the program, designed to ensure a fair playing field for all parties. To date, the data indicates that in cases decided by three public arbitrators, customers were awarded damages 51 percent of the time, whereas in cases decided by a panel including one nonpublic arbitrator and two public arbitrators, investors were awarded damages 32 percent of the time.  For the full data report, click here.

Notably, FINRA and the FINRA Investor Education Foundation have continued to enhance its outreach strategies and investor education by distributing educational brochures, holding live events, and creating an Outsmarting Investment Fraud curriculum.  The Foundation also put  more focus into providing services for military families through their military financial readiness project. 


A hot new topic in 2012 was “crowdfunding” since new provisions relating to crowdfunding were introduced in the April, 2012 JOBS Act.  To ensure that the capital-raising objectives of the JOBS Act can be advanced while simultaneously protecting investors, FINRA has requested and solicited comments on specific rules it should adopt for registered funding portals that become FINRA members.  In addition, FINRA has also asked for comments on the application of its existing rules to broker-dealers engaging in crowdfunding activities. 

If you’re a FINRA member firm, associated person, or an investor involved in a potential FINRA-related claim, contact the experienced attorneys at Cosgrove Law Group, LLC for assistance.