Consistency and Transparency in Oversight of Portals

a. Consistent regulatory compliance is necessary to ensure the viability of the industry. All portals should be subject to the same level of scrutiny and enforcement. Rule violations should be addressed quickly to maintain the public’s confidence in the tool. To prevent the appearance of arbitrary inconsistency, regulatory decisions and guidance provided by both FINRA and the SEC should be made available to the public.

b. Portals report that FINRA is not transparent about the requirements it imposes for new applications or for audits, creating a great deal of uncertainty and a long drawn-out approval process. FINRA often imposes multiple extensions on the approval process as seemingly arbitrary requirements are imposed. We request that FINRA be required to (1) publish guidance regarding its requirements for new portals, (2) update the FP-NMA to reflect what is actually required to be considered complete, (3) provide guidance for ongoing compliance of existing portals, and (4) treat each portal consistently in regards to those requirements.

Background

FINRA has been inconsistent in the application of the rules associated with funding portals. In many instances, certain funding portals are able to undertake operations that FINRA later says new portals may not undertake, yet the established portals are still able to use them. One instance of this is the use of Series LLCs for creation of Reg CF funding vehicles. This inconsistent enforcement creates competitive advantages for some portals over others, while leaving investors and issuers uncertain about what services portals may provide.

Other examples of this include FINRA’s inconsistent position on what constitutes a financial interest that would prohibit a portal from being able to host an offering. Some portals appear to host offerings for affiliate entities, with no public action being taken to rein in such behavior, leading to market uncertainty about the prohibition.

New funding portals also face an unacceptable amount of uncertainty during the application process. While FINRA’s website and the actual application form present one picture of the application process, the actual process requires applicants to guess as to what FINRA is looking for in a funding portal application. For instance, for an application to be deemed complete, funding portal applicants must discuss offerings of digital assets or acceptance of digital currency, even if that is not part of the business plan of the portal. If certain discussions are required for the application to be deemed complete, then FINRA should be transparent about what is required to be discussed and not require applicants to guess what issues must be discussed, whether or not they apply to the applicant.

Applicants also encounter uncertainty and additional costs based on FINRA imposing the use of service providers. For instance, the rules for portals under Regulation Crowdfunding do not require that recordkeeping be done by a third-party if the portal is capable of maintaining its own records. However, in our experience, FINRA will not approve an application if a third party is not engaged for that recordkeeping function. 

Requested Change

The SEC should require FINRA to clearly articulate and make public its determinations regarding specific practices by funding portals and how those practices apply to its published rules. 

We also request that the SEC direct FINRA to update the application for new funding portals, which has not been updated since 2016, and so does not reflect all of the unwritten requirements for funding portal applicants that have been developed over the past 8 years. 

Statutory Authority

These changes could be accomplished under existing statutory authority via the SEC’s oversight of FINRA.