Investors participate in a wide range of financial markets. And whether it’s stocks or bonds or real estate or startups, those markets are in part shaped by regulators. So it’s important for investors to understand who those regulators are, what they do, and how they can impact the markets they monitor.
Let’s focus on the Financial Industry Regulatory Authority (FINRA). (To learn more about the Securities and Exchange Commission, another important regulatory body, click here.)
What Is FINRA?
FINRA is an independent, self-regulated, government-authorized organization that writes and enforces rules governing registered brokers and broker-dealer firms in the U.S. It is overseen by the SEC, which monitors securities markets on a broad level and protects investors.
FINRA exists to make sure broker-dealers, capital acquisition brokers, and funding portals — all of which are in the business of buying and selling securities — are operating in an honest, fair, and ethical manner. In addition to overseeing securities firms and brokers, FINRA administers qualifying exams — including the Series 3 (commodities) and Series 7 (securities) exams. Securities professionals must pass these exams in order to solicit, buy, or sell securities (or commodities futures contracts) or to supervise others who do.
FINRA also has the power to take disciplinary actions against registered individuals or firms. Violations result in fining or banning brokers and brokerage firms.
FINRA also plays an important role in crowdfunding raises and startup investing. Since it’s focused on brokers and broker-dealers, FINRA has a major impact on the back end of the crowdfunding process. It makes rules that both crowdfunding portals and issuers (aka the startups that are raising money) must follow.
How Does FINRA Impact Crowdfunding Portals?
Crowdfunding portals (like Wefunder, Republic, and StartEngine, for example) must register with FINRA and be SEC compliant. The portal must allow FINRA to audit or investigate its business, including the portal’s offices, systems, platforms, and records. FINRA also requires portals to report their gross revenue every year by February at the latest.
FINRA holds portals to “high standards of commercial honor and just and equitable principles of trade.” This means portals cannot push any kind of sale or transaction through deceptive or fraudulent means. They cannot include any false, exaggerated, or misleading statements or claims in their communications. And they also cannot imply that past performance somehow guarantees future results.
How Does FINRA Impact Startups?
Now let’s move on to issuers — also known as the startups raising capital. Because FINRA monitors broker-dealers that many startups use to help raise capital, the organization often has to review and approve the commercial relationship between issuers and broker-dealers. The fear is that if a broker-dealer is overcharging, it can impact the amount of money a startup raises — which hurts investors. But if these checks are not done in a timely manner, it delays when a startup can begin raising capital. And hurting startup growth hurts investors too. Significant delays in the capital raising process can materially impact a startup’s chances for success.
So while investors don’t often feel the impact of FINRA directly, this regulator is an important part of the startup investing ecosystem.
Note: this article was originally published February 21, 2020. It was updated on February 10, 2023.