January 10, 2013 / 8:26 PM / 5 years ago

FINRA takes first steps to regulate crowdfunding industry

(Reuters) - The Financial Industry Regulatory Authority (FINRA) has asked crowdfunding websites to voluntarily register with it as a first step towards regulating a fast-growing industry that helps small businesses secure funding.

FINRA, Wall Street’s industry-funded watchdog, said it was working with the Securities and Exchange Commission (SEC) to draft rules that would govern crowdfunding.

In the meantime, FINRA has asked the websites to register with it and provide details that would help it draft the rules.

Crowdfunding is a capital-raising strategy in which investors buy small stakes in ventures through various websites.

Interest in crowdfunding exploded after President Barack Obama signed the Jumpstart our Business Startups, or JOBS, Act last April.

The law, aimed at boosting small business growth, legalized crowdfunding as a way for businesses to solicit private investors with the promise of potential returns.

But the SEC needs to adopt rules before small businesses can offer and sell securities to investors through the crowdfunding process, and the JOBS Act directs the SEC to adopt these rules by roughly April 2013.

While crowdfunding portals could set up their own self-regulatory organization, it is more likely that FINRA will serve in the role, the regulator’s Chief Executive Richard Ketchum told Reuters earlier this week.

“We will be very focused on this marketplace,” Ketchum said, adding that FINRA will regulate crowdfunding portals as a separate entity.

FINRA, which oversees 4,290 brokerage firms and about 630,000 brokers, expects brokerages to become active in the crowdfunding business once the new rules are in place, Ketchum said after FINRA released statistics about its 2012 enforcement efforts on Tuesday.

One of the largest and most famous crowdfunding websites, Kickstarter, claims to have received almost $320 million in pledges for over 18,000 innovative projects in 2012 alone.

Thursday’s announcement asks crowdfunding portals to file an “Interim Form” with the watchdog with details on their ownership, funding, management and business model.

FINRA added that the websites would have to re-register once the final rules are agreed upon.

Reporting by Himank Sharma in Bangalore and Suzanne Barlyn in New York; Editing by Roshni Menon

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