In our previous article, we discussed how to register a Crowdfunding Portal under Reg CF. Today, we will talk about how to get your Crowdfunding Portal to register as a member of FINRA.
While crowdfunding has become an increasingly popular means for entrepreneurs and startups to raise capital. Crowdfunding Portals, the platforms that enable these transactions, must follow regulations and meet certain standards to protect investors and maintain the market’s integrity. One such requirement for some Crowdfunding Portals in the United States is to become a member of the Financial Industry Regulatory Authority (FINRA).
So let’s talk about it!
Overview: The Process and Its Necessity
FINRA is a self-regulatory organization (SRO) that oversees brokerage firms and their registered representatives in the United States. In short, its mission is to protect investors by ensuring that the securities industry operates fairly and honestly. To achieve this, Crowdfunding Portals that facilitate transactions in the securities market must become members of FINRA. This ensures that they adhere to rules and regulations set forth by FINRA and the Securities and Exchange Commission (SEC), ultimately safeguarding the interests of investors.
Qualifying Companies and Entities
To qualify for FINRA membership, a Crowdfunding Portal must meet specific criteria. The company or entity should:
- Be engaged in the securities business, specifically in the crowdfunding industry. Think Equity Crowdfunding for Real Estate or Startups.
- Be a registered funding portal under the SEC. How to register your Crowdfunding Portal with the SEC.
- Have a minimum net capital, as required by the SEC and FINRA. The exact amount varies depending on the scope and nature of the crowdfunding activities conducted by the portal.
What is the minimum net capital figure required? The SEC and FINRA have not explicitly defined that figure, as it can vary depending on the scope and nature of the crowdfunding activities conducted by the portal. While broker-dealers have specified net capital requirements, funding portals operate under a different regulatory framework, and their requirements might be less stringent.
Required Paperwork and Information
The process of becoming a FINRA member requires the submission of several forms and documents.
- Form FP-NMA: This is the Funding Portal New Member Application form. It provides information about the applicant’s business, operations, and key personnel.
- FINRA Entitlement Forms: These forms grant access to FINRA’s various online systems, allowing applicants to file required documents electronically.
- Form FP-CMA: This is the Funding Portal Continuing Membership Application form, which must be filed if there are material changes to the business or operations after the initial application.
- Written Supervisory Procedures (WSPs): Applicants must provide detailed documentation outlining their supervisory structure, policies, and procedures to ensure compliance with applicable regulations.
- Anti-Money Laundering (AML) Program: Crowdfunding Portals must develop and implement an AML program to prevent, detect, and report suspicious activities. We recommend that you take a look into North Capital’s Transact API for AML support.
Other Procedures to be Documented
In addition to the paperwork and information mentioned above, Crowdfunding Portals must also document other procedures and policies, such as:
- Business Continuity Plan (BCP): A detailed plan outlining how the Crowdfunding Portal will respond to and recover from potential disruptions, including natural disasters, cyberattacks, or other significant events.
- Customer Identification Program (CIP): A program to verify the identity of customers in accordance with the USA PATRIOT Act and other applicable regulations.
- Cybersecurity: Crowdfunding Portals must establish and maintain a cybersecurity program to protect customer information and their own systems.
- Recordkeeping: A process to ensure that all required records are maintained, organized, and easily accessible for inspection by FINRA and other regulatory authorities.
- Employee Training: A comprehensive training program to educate employees on regulatory requirements, internal policies, and procedures, as well as industry best practices.
Probable Additional Paperwork
In addition to the forms and documents mentioned earlier, Crowdfunding Portals may also need to provide additional paperwork, such as:
- Organizational documents: Articles of incorporation, partnership agreements, or other documents that detail the structure and governance of the entity.
- Agreements with third-party providers: Contracts or agreements with any third-party service providers and such.
Crowdfunding portals play a crucial role in the modern fundraising ecosystem. To protect investors and maintain the integrity of the securities market, these portals must become members of FINRA. The process involves meeting specific criteria, submitting required paperwork and information, documenting various procedures, and maintaining adequate net capital. By adhering to the guidelines set forth by FINRA and the SEC, crowdfunding portals ensure a transparent, fair, and secure environment for investors and startups alike.
As the crowdfunding industry grows, maintaining regulatory compliance will remain essential to building trust and promoting innovation.