Wednesday 17 July 2019
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FINRA Issues Crowdfunding Rules!

Crowdfunding has been popular over the past decade and crowdfunding platforms have been set up in the USA and outside. Some of these platforms have attracted a lot of fundraisers and have made a name for themselves. Kickstarter and Indiegogo are examples. Crowdfunding in India has grown in popularity too. Accordingly, websites like Impact Guru, Milaap and Ketto have been set up for fundraising.

Crowdfunding is mostly done online and through the medium of a platform. You can usually raise money from more than one country and from all over the world. This means that government control over crowdfunding is minimal. This is why you need a regulatory body for crowdfunding.

SEBI in India and various other bodies try to regulate crowdfunding. In fact, SEBI has put equity crowdfunding on hold in India because of concerns over lack of investor skills. However, in places like the United States where the economy is highly privatized and government interference is minimum, private bodies are created to check the already growing start-ups and other companies. FINRA or the Financial Industry Regulatory Authority is one of these bodies.

FINRA is a non-governmental organization which works by registering members who have to follow certain rules. These are rules used to maximize business while simultaneously limiting risks. FINRA works with thousands of organizations as its members and it oversees their activities. It sets rules in order to maintain a proper business climate. FINRA runs through securities, contributions by its members, membership fees etc. FINRA can impose punitive action if any organization violates its rules. However, in the recent past, they have been criticized for not being strong enough with those who have flouted their rules. Crowdfunding platforms to come under FINRA and because of this, they are subject to rules set by FINRA. This keeps problematic practices in check.

In May 2017, FINRA released a new notice on crowdfunding and the JOBS Act. It allowed investors to invest more cash as per the JOBS Act. This is because the JOBS Act has a provision for adjusting upper caps in investment in terms of inflation. Money devalues during inflations hence prices are pushed up. While mild inflation is healthy for the economy, uncontrolled inflation is a sign of an unhealthy economy. Therefore, it makes sense that during a time of inflation, the upper cap over investment amounts should be pushed up.

FINRA has another major function. Since there are hundreds of crowdfunding portals active now, it ensures that crowdfunding portals are registered. The body also ensures that all crowdfunding companies follow federal securities laws and FINRA rules which are set from time to time. In the same notice FINRA makes investors aware that crowdfunding investments carry risk. A person could lose all of their money. It also urges people to push for knowing their net worth.

Depending on the amounts raised, issuers of crowdfunding securities need to make disclosures. For money raised up to $107,000, issuers need to release financial statements, specific line items from income tax returns both of which are certified by the principal executive officer of the company.

For amounts raised from $107,000 to $535,000, financial statements reviewed by an independent public accountant and the accountant’s review report is needed. If audited statements are available, they should be submitted too.

If the amount raised is more than $535,000 but less than $1.07 million, financial statements reviewed by an independent public accountant and the accountant’s review report has to be provided. Audited statements, if available, must be provided too.

For all other issuers, financial statements audited by an independent public accountant and the accountant’s audit report has to be provided.

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