Broker-Dealers Offered Opportunity to Provide Comments to FINRA Rules for Capital Formation

The Financial Industry Regulatory Authority, known as FINRA, is undergoing a review of internal operations and programs as part of a review process dubbed FINRA 360. FINRA, as an independent self-regulatory organization with the overall goal of protecting investors and creating efficiency in the markets, governs many in the financial services industry in conjunction with the securities and exchange commission. FINRA has been issuing notices and seeking comments from those in the industry, as part of FINRA 360, with the goal of identifying opportunities to further the FINRA mission.

Recently, FINRA started the review process for rules that pertain to broker-dealers and their involvement with the capital formation process, and has issued corresponding notices. One of the recent notices from FINRA includes regulatory notice 17-14, seeking comments regarding broker-dealers when involved with unregistered securities and operating funding portals. The broad spectrum of rules that fall within the purview of notice 17-14 include funding portals, crowdfunding, capital acquisition brokers, unlisted real estate investment trusts, and other administrative and operational rules for raising capital.

For those wishing to submit comments on the rules, FINRA has set a deadline of May 30, 2017. For more information, FINRA notice 17-14 can be found at the following link:

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SEC Updates Rules for Capital Raises Through Regulation D

Over the past couple of years, the Securities and Exchange Commission (“SEC”) has evolved how companies can raise capital, while simultaneously maintaining adequate protection for investors. For example, starting in May of 2016, companies were provided the option of raising capital through the newly created Regulation Crowdfunding, but the SEC was not finished modernizing the laws for exempt securities issuance. On October 26, 2016, the SEC finalized rules amending Regulation D, which contains exemptions from securities registration.


Many non-public companies, at all stages, rely on Regulation D for capital raises. Depending upon the unique circumstances of the company, the company may have utilized registration exemptions under rule 504, 505, or 506 of Regulation D. However, exemption under rule 505 became disfavored compared to rule 504 and 506 because of the additional, and oftentimes onerous, regulatory requirements. Recognizing this trend, the SEC finalized rules that increased the amount a company can raise under rule 504 to $5,000,000 dollars, up from $1,000,000, in a 12-month period. This means that the same amount of capital can be raised under rule 504 as was possible under rule 505, allowing the SEC to repeal rule 505.


For most companies relying on Regulation D to raise capital, the factors used before the rule change will likely continue to be the predominate factors when determining whether to use rule 504, often referred to as the “seed capital” exemption, or rule 506 exemption. For example, an entrepreneur in the first few years of business that requires additional capital to get a product, currently in research and development, to the market, will likely look to rule 504, which limits the total money raised, but is more navigable for new companies. Moving forward, as the SEC undergoes a change of leadership, starting when SEC Chairwoman Mary Jo White steps down in early 2017, these rules may continue to evolve and any company looking to utilize a Regulation D exemption should consult with legal counsel. For more information on the current changes under SEC Regulation D, please visit the following SEC website:

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IRS Implements New Safeguards for Income Verification Express Service

The Internal Revenue Service (“IRS”) is implementing new requirements for taxpayers who use the Income Verification Express Service (“IVES”), a service companies use when signing off on the incomes of loan applicants. The new safeguards are part of a larger effort to protect taxpayers and fortify authentication standards.

The new requirements were sent to IVES participants shortly after the IRS announced the initiative. Among others, the requirements involve collecting data to verify participant clients and the individuals that clients authorize to submit and receive IRS transcripts on the clients’ behalf. The IRS will not deliver borrower income transcripts unless IVES participants certify their compliance with the new requirements. Additional safeguards include requiring individuals to have strong passwords and unique login credentials.

The new protections reflect initiatives being taken elsewhere in the tax system. Recently, the IRS shut down the electronic filing (“e-file”) PIN tool, a tool to assist with electronic tax filing, after criminals attacked the system and stole PIN numbers. The IRS is taking these steps in an attempt to protect taxpayer information and combat potential fraud.

The new requirements are in effect as of July 1, 2016.

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Law Firm Requests SEC Redefine “Accredited Investor” To Include Same-Sex Couples

The Supreme Court’s decision to overturn DOMA and recognize same-sex marriages at the federal level has drastically changed tax and employee benefits laws. It may also change SEC rules in the near future.

 Under current SEC rules, certain offerings of stock by small companies can only be made to accredited investors. Entrepreneurs rely heavily on these offerings to raise venture capital. One of the ways that an individual can become an accredited investor is by having a minimum net worth or salary, either alone or with her spouse. The minimum wealth requirements are generally easier to meet with a spouse than they are for an individual to meet on her own.

 As a result, one law firm has called for the SEC to amend their regulations to permit same-sex couples to use the spousal requirements for accredited investor status. If the SEC agrees to the change, it will enable many same-sex couples interested in angel investing to pursue more opportunities.

© 2013 Parsonage Vandenack Williams LLC

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