On January 2, 2014, the Financial Industry Regulatory Authority (“FINRA”) published its annual priorities letter for 2014, chief among which will be IPOs, general solicitation in private offerings, crowdfunding portals and microcap fraud.


In the area of IPOs, FINRA intends to focus on “spinning,” a practice in which an underwriter allocates “hot” IPO shares to directors and/or executives of potential investment banking clients in exchange for investment banking business.  An IPO is considered to be a “hot” offering when investor demand significantly exceeds the supply of securities in the offering.  Spinning became the subject of regulatory scrutiny during the dot com driven IPO boom of the late 1990s, and is a prohibited practice under FINRA Rule 5131.  FINRA is also concerned about bad actors being drawn to the IPO market, which often occurs during a robust market.  Finally, FINRA intends to focus on compliance with rules governing the sale and allocation of IPO securities, including whether firms are incenting associated persons to sell cold offerings to obtain client allocations of hot offerings.  Shares in hot offerings often trade at substantial premiums to the offering price.  An IPO is considered to be a “cold” offering when there is weak investor interest in the IPO shares.

General Solicitation in Private Offerings

Private placement abuses by placement agents has long been a primary focus of FINRA. The recent amendments to Rule 506 of Regulation D, which became effective September 23, 2013, remove the prohibition on general solicitation and advertising provided that all purchasers are accredited investors and the issuer takes reasonable steps to ensure they are such. FINRA believes that general solicitation, which before the amendments had been permitted only in connection with public offerings registered with the SEC, provides new challenges for securities firms to ensure that advertisements and other marketing materials are based on principles of fair dealing and good faith, are fair and balanced and provide a sound basis to evaluate the facts about securities acquired in a private placement.

Crowdfunding Portals

Title III of the JOBS Act, enacted in April 2012, fashioned a new exemption in the form of Section 4(a)(6) of the Securities Act for offerings of securities through funding portals with limits on amounts raised ($1 million during any twelve month period) and invested, and instructed the SEC to promulgate rules to implement the new exemption.  On October 23, the SEC issued its proposed rules on equity crowdfunding, and on the same day FINRA issued its proposed rules on crowdfunding portals.  The new equity crowdfunding exemption will not be available until the SEC approves final rules. The objective of FINRA’s proposed rules is to ensure that the capital raising objectives of the JOBS Act are advanced in a manner consistent with investor protection.  Under the proposed rules, a private company raising capital under the crowdfunding exemption will be required to use an intermediary that is either a registered broker-dealer or a newly-created category of intermediary, a funding portal, which must register with the SEC and FINRA. If the intermediary is a funding portal, its activities will be more limited than those permitted for broker-dealers. For example, a funding portal may not solicit purchases, sales or offers to buy the securities offered or displayed on its website or portal; compensate promoters, finders or lead generators for providing information on individual  investors; hold, manage or accept customers’ funds or securities; or offer investment advice or recommendations.  FINRA’s proposed rules attempt to streamline the registration and oversight of funding portals to reflect their limited scope of permitted activity. The proposed rules address a number of topics, including the membership application process, and fraud and manipulation. The proposed rules also contain provisions to ensure that bad actors do not enter the system. In its priorities letter, FINRA indicated that as the rules become effective, and funding portals become FINRA members, it will implement a regulatory program designed to protect investors while recognizing the distinctions between funding portals and broker-dealers.

Microcap Fraud

Offerings of microcap and speculative low-priced over-the-counter securities continue to be an area of significant ongoing concern for FINRA. FINRA is urging securities firms to review their policies and procedures to ensure that activities at the firm related to microcap and low-priced OTC securities are compliant.  FINRA believes that firms should carefully supervise employees who conduct direct or indirect outside business activities associated with microcap and OTC companies, traders involved in trading microcap and low-priced OTC securities and firm activities where an affiliate of the firm is the transfer agent for the microcap or low-priced OTC securities. Finally, FINRA is encouraging firms to monitor customer accounts liquidating microcap and low-priced OTC securities to ensure, among other things, that the firm is not facilitating, enabling or participating in an unregistered distribution.