Common Owner CF is Officially the 58th Registered Funding Portal

After a long vetting process, Common Owner is now officially registered with the Financial Industry Regulatory Authority (or “FINRA”) to post Regulation Crowdfunding (“Reg CF”) offerings!

We are the only company in New York State, outside of New York City, that is able to legally facilitate Reg CF offerings.

What does FINRA Registration mean in the context of a Funding Portal?

Whether you're thinking of doing a Reg CF raise, researching funding portals, or may be considering starting a crowdfunding portal yourself, you're likely to have come across FINRA, the Financial Industry Regulatory Authority.

Some questions you may have had:

How is FINRA different from the SEC?

First and foremost, the U.S. Securities and Exchange Commission is a government agency, while FINRA is an independent, non-governmental, private corporation with regulatory authority. The SEC is responsible for enforcing federal securities laws, regulating the securities industry, studying the market and proposing new rules and regulations, while FINRA is focused primarily on investment vehicles (brokerage firms, exchange markets like the New York Stock Exchange, funding portals like Common Owner, etc.) and enforcing the rules and regulations therein created by the SEC.

FINRA is the primary gatekeeper for being able to work in those markets. It administers qualifying exams (the Series 7 exam for "General Securities Representative Qualification Examination", for instance) and for enforcing the rules, with the ability to levy fines, order restitution, as well as suspending, expelling, and barring individuals and firms from securities business. For criminal activity (such as fraud or insider trading), those are referred back to the SEC for prosecution.

Why are some online capital raising websites not registered with FINRA?

Websites that simply list or promote certain exempt offerings on behalf of issuers, including Rule 506(c), Reg A, or intrastate offerings do not need to be registered with the SEC of FINRA. The issuers will need to file paperwork with the SEC or state agencies prior to and during the offering and will need to follow the rules of the exemption (i.e. accredited investors only).

Companies that facilitate Reg CF offerings through an online platform are called “Funding Portals.” Funding Portals are regulated intermediaries, like broker-dealers, that help to facilitate the offering. However, unlike a Broker-Dealer, they do not handle investor funds (everything is handled via third-party escrow). Also, unlike the listing services discussed above Funding Portals cannot promote or endorse a specific offering. Funding Portals need to be registered with the SEC and become members of FINRA, subjecting them to an explicit set of rules regarding business operations, financing, and especially record-keeping procedures.

The regulators expect that accredited investors understand the risks of a given offering and are able to absorb the losses if the company conducting the offering does not work out. However, Reg CF is open to anyone, meaning people with minimal investment experience in private offerings can partake, with certain restrictions. Regulation Crowdfunding places additional burdens on Funding Portals to help protect these non-accredited investors who may not be able to comprehend the risks or absorb the losses from a bad investment.

The SEC and FINRA are more hands-on with Funding Portals to ensure they perform proper and thorough due diligence on an offering before it is posted to prevent fraudulent behavior. This puts the responsibility of identifying and reducing fraud on the portal rather than on the investors. So far, this approach has been successful, with very few cases of fraud reported regarding offerings conducted through a Funding Portal.

What does the Reg CF application entail?

The application is a two-stage multi-month process that includes traditional business documents, as well as an in-depth look into the company's (as well as its directors) financials and records. This includes (but is not limited to):

Basic business formation documents (articles of incorporation, business plan, etc.)
Fingerprints for all directors and associated persons (including subcontractors involved in the day-to-day operation)
Bank statements for: the company's initial capitalization, all other capital contributions (as well as bank statements from directors before and after capital contribution), and evidence of capitalization (voided checks, digital deposits).
Funding Portal operational materials.
Operational website that can be reviewed and tested (including emails and messaging through the website) that complies with all regulatory requirements.

What does the application review look like?

Once the basics are out of the way (business documents, fingerprints, and financials) FINRA will conduct a detailed review of your operational materials, and website. This includes:

The policies and procedures for the company
The structure, functions, and content of your website
A breakdown of your on-boarding process
Sample of communications from the website to issuers and investors
Functionality of required components for funding portal
Breakdown of digital and physical record keeping practices, including WORM (write once, read many) compliant storage solutions.

After FINRA has reviewed these materials, they will provide feedback and schedule an interview. The interview covers:

Any questions FINRA has generally not covered in business documents
Any questions not yet resolved via e-mail or that require further breakdown
A demonstration of the website functionality, preferably running through a project on-boarding process
Discussion with their compliance team about acceptable (and problematic) forms of marketing.

After the interview and any last changes required are made, FINRA will make a decision regarding the application. After successful registration, there are continual check-ins throughout the life of the funding portal to ensure it maintains integrity for the safety of its investors. This also includes storage of some documents and records into perpetuity or for up to five years depending on the document type.

Overall, the comprehensive and in-depth review of Funding Portal applicants should lead to more responsible Funding Portals and issuers using Reg CF. This is particularly important in an industry where people with minimal investing experience can get involved in private securities offerings. While this may mean fewer Funding Portals go to market than one might expect considering the excitement around the industry and potential for disruption, it means those that do should be better prepared to create a safe and compliant environment for investors.