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Facilitation, Formation and Feedback: FINRA’s Reg Notice on the Capital Raising Process

July 25, 2023

An efficient capital raising process fosters business expansion, job creation and economic growth. And FINRA's members play an important role in this vital piece of our capital markets. Currently, FINRA's soliciting comments on the impact FINRA's Rules have on the capital formation process, as it looks for ways to increase efficiency and reduce unnecessary burdens. On this episode, we'll dig more into this process and FINRA's recent Request for Comment with Joe Price, Senior Vice President of Corporate Financing and Advertising Regulation, and discuss the recent Regulatory Notice 23-09 on FINRA's Rules impacting capital formation.

Resources mentioned in this episode:

Reg Notice 23-09: Capital Formation Request for Comment

Reg Notice 17-14: Request for Comment on FINRA Rules Impacting Capital Formation


SEC EDGAR Database

Frequently Asked Questions About Private Placements

FINRA Board of Governors

Listen and subscribe to our podcast on Apple PodcastsGoogle PodcastsSpotify or wherever you listen to your podcasts. Below is a transcript of the episode. Transcripts are generated using a combination of speech recognition software and human editors and may contain errors. Please check the corresponding audio before quoting in print. 


00:00 - 00:25

Kaitlyn Kiernan: An efficient capital raising process fosters business expansion, job creation and economic growth. And FINRA's members play an important role in this vital piece of our capital markets. Currently, FINRA's soliciting comments on the impact FINRA's Rules have on the capital formation process, as it looks for ways to increase efficiency and reduce unnecessary burdens. On this episode, we'll dig more into this process and FINRA's recent Request for Comment.

00:25 – 00:35

Intro Music

00:35 - 00:57

Kaitlyn Kiernan: Welcome to FINRA Unscripted. I'm your host, Kaitlyn Kiernan. I'm pleased to welcome a new guest to the show to discuss an important topic. Joining us today is Joe Price, Senior Vice President of Corporate Financing and Advertising Regulation, to discuss the recent Regulatory Notice 23-09 on FINRA's Rules impacting capital formation. Joe, welcome to the show.

00:57 - 00:59

Joe Price: Thank you. Thanks for having me.

00:59 - 01:05

Kaitlyn Kiernan: To kick us off today, can you introduce yourself and tell us how you ended up in your current role with FINRA?

01:06 - 01:51

Joe Price: Sure, I'll be glad to. I started out as a compliance investigator at the Coffee, Sugar and Cocoa Exchange. That's a commodity exchange. Following law school, I went down to D.C. and did antitrust litigation for the Federal Trade Commission before walking up the street and getting a job with the Securities and Exchange Commission, where I was in the Office of General Counsel and eventually was Assistant General Counsel at the SEC for some years. I came to FINRA in 1996, initially as Counsel in the Advertising Regulation department, then Director and Vice President in the Corporate Financing department, and finally a Senior Vice President where I've got responsibilities of both advertising regulation and corporate financing.

01:51 - 02:10

Kaitlyn Kiernan: Coffee, sugar and cocoa. I don't know how you'd start a career better than that. There's a few better things in life than that trio. So, before we dig into the Reg Notice that I mentioned, what exactly does capital formation mean? Can you maybe give us some examples of some of the types of capital formation?

02:10 - 03:10

Joe Price: All brokers, including underwriters, have to belong to FINRA. And so, to us, capital formation involves brokers raising capital for large and small businesses. Raising capital for business is, if not the most important thing brokers do, certainly one of the most important things that they do, and it really allows businesses to launch, expand, modernize, innovate, create jobs. It's vital to the economy, the capital raising. And we're going to discuss at some length today both public offerings, which are IPOs, trust offerings, shelf offerings. We're going to discuss private placements, where they're unregistered offerings, so they're not registered with the SEC, but brokers sell interests we call issuers—an issuer is a company that needs to raise money— generally smaller companies, although there are big institutional investors in the private placement market as well.

03:11 - 03:15

Kaitlyn Kiernan: And so, what is FINRA's role in the capital formation process?

03:16 - 03:59

Joe Price: We have rules that they have to abide by. And the rules are really designed to keep markets transparent and bona fide and to protect investors. So, our role overseeing the broker's role in the capital markets means that we're going to get people more willing and able to invest and to support those businesses that have such a positive impact on the economy. It's really essential to our economy, the ability of companies to raise money in the markets and then essential to have oversight over those activities so that they can go on in a legitimate and fruitful and productive way.

04:00 - 04:09

Kaitlyn Kiernan: So, FINRA's facilitating the market so both the companies feel comfortable, investors feel comfortable, so it creates a strong market for everyone.

04:09 - 04:12

Joe Price: That's exactly right. And that's the goal.

04:13 - 04:24

Kaitlyn Kiernan: We're here today to talk about Reg Notice 23-09, about FINRA's Rules related to capital formation. What's the point of this Notice? Why are we publishing it now?

04:25 - 05:53

Joe Price: Going on 26, 27 years at FINRA, and we are always amending and rewriting rules to comply with the changing industry practices. And one thing that's critical to us is having rules that protect investors, but also to have rules that make sense and aren't unnecessarily burdensome. Because, you think about private placements, if we're loading up a bunch of unnecessary requirements or rules, it's going to make it more difficult or more expensive for those small businesses to raise capital. We're constantly looking at our rules to see if they work, if they're unnecessarily burdensome, if there's ways that they need to be strengthened, given abuses out in the market.

Five years ago, when in 2017, we did the capital formation Notice and it was successful in many ways about getting comments. It's one of the great things about FINRA, is we have the ability to interact with the industry participants and others and constantly think about ways to improve and getting it right. So, five years later we're doing it again. We've got several projects in the works that are designed to strike the appropriate balance between investor protection and unnecessary burdens, rules that work and promote raising capital. So, it's kind of always time in my mind for requesting comment on the way our rules work and apply to capital formation.

05:55 - 06:23

Kaitlyn Kiernan: Like you mentioned, this isn't FINRA's first Notice on capital formation process. As part of the FINRA 360 process in 2017, there was Regulatory Notice 17-14, and a lot of changes came out of that Reg Notice. And the 2023 Reg Notice goes into a lot of detail on some of those changes. But today, at a high level, can you describe some of the changes that we made in recent years as a result of that last Request for Comment?

06:23 - 07:10

Joe Price: One of the things we did following the Notice is we very significantly rewrote the corporate financing rule. Because technology has improved the way that we can do reviews, we cut out a lot of information that had to be filed. Remember, the IPOs, the public offerings, the registered offerings usually have law firms that file with us, and that gets to be very expensive. So, in ways to cut down on what they had to do, now we have access to EDGAR. Instead of getting a lot of information filed with us by the law firms, for example, for shelf offerings now, they give us the accession number and we're able to extract the information we need to get a review on our own. So, you save all those legal fees. It's the same with IPOs.

07:11 - 07:37

Kaitlyn Kiernan: So, it seems like a theme there is using, just, technology to streamline the process and reduce duplicatory efforts with filings. And you mentioned EDGAR, that's the SEC system where firms file documents like an S1 or their annual financial statements. So, FINRA is now scraping the EDGAR system, so they just file once with the SEC and then FINRA can extract that information.

07:37 - 09:15

Joe Price: Exactly. We also recognize the role of venture capital. Venture capital is something that promotes capital formation. We made a lot of changes to the rule to recognize that legitimate venture capital and the securities received in return for that isn't something that should be considered underwriting compensation and capped. Then private placement programs, since we started it really up in 2013, there's a form that the brokers file on their Reg D deals that provides us information that makes our reviews easier. Well, we've updated that three times and each time the goal is to ask information that is focused, and we feel like that lessens burdens on the brokers, because when we review private placement memorandum, or PPM, if we see something, brokers are required under Reg BI and our suitability rules to have a reasonable basis to make a recommendation and to do due diligence on that.

If we see something kind of hinky in the PPM, we're going to call the broker and say, "Well, what did your due diligence, your reasonable investigation, reveal to you about this fact?" And by continuing to update the form to make it more focused, they get fewer phone calls because our experience now over ten years has made it easier for us to see what information is the most important to us and the least burdensome to investors. So, those are two of the things that are talked about in the Notice that we've done since then.

09:15 - 09:24

Kaitlyn Kiernan: And how does FINRA work to balance the interests of issuers and investors when implementing some of these changes?

09:24 - 10:53

Joe Price: It's a long process, but it's a wonderful process. Of course, all our rules go to our Board of Governors. The Board of Governors has many advisory committees. Last year I probably went and talked to at least eight different advisory committees. We have a Corporate Financing Committee. It's got people who work for the investment banks that are active in the market as underwriters. And so, we're constantly meeting with them and getting their feedback go out in industry conferences frequently, especially in the Reg D space, it's a good place because the private placement sold by some of the smaller brokers, not the big Wall Street investment banks. Of course, before we do anything, we publish a Notice proposing the changes. We get comments, we file with the SEC, part of our filing response to the comments we got in the SEC then publishes in the Federal Register. We get comments there, we respond to those comments.

The American Bar Association has a subcommittee that's called the Corporate Financing Subcommittee of their Business Committee, and we meet with them routinely. They bring us a lot of good ideas. So, it's very interactive and very informative. It's just priceless, actually, to be able to have those kind of interactions and to make sure that when you are changing rules that of course are very important, my gosh, they're trying to steer capital formation in the right directions to make sure that we get the whole story and try to get it right.

10:54 - 10:58

Kaitlyn Kiernan: It's great, but not actually priceless if Joe Price is involved.

10:59 - 11:00

Joe Price: There you go.

11:01 - 11:11

Kaitlyn Kiernan: Our financial markets change so rapidly these days. So, the six years since the last Reg Notice can seem like a long time. How have you seen the capital formation process evolve over the past six years?

11:12 - 13:36

Joe Price: Well, one example is the syndicate settlement rule that got passed and it set a land speed record, I think. I've never worked on a rule amendment that went quicker. From soup to nuts we got the whole thing through the SEC and approved in a year. Our Rule 11880 says within 90 days the syndicate expenses and commissions have to be settled. And what that means is there's roadshows, there's legal fees, closing costs, travel expenses. And then you've got the amount that the syndicate has earned for selling the deal. I looked yesterday, year to date, $845 billion in bonds have been issued, sold, just this year. So, it's a huge market.

Well, what the syndicate settlement says is you take those expenses, and you subtract them out of the commissions and then they're distributed among the syndicate members based on the amount that they've sold. But 90 days is a long time to wait for that money. And so, we had a, interestingly, it was a diversity and inclusion Notice where we requested comments on things that might help. And this came back, "shorten the syndicate settlement cycle so we can be involved in more deals if we're not waiting three months to get paid," basically. And it turned into a wonderful situation because the bigger banks that tend to be the lead managers say, "Hey, it takes us a while to get all the bills in and so we need some time to do it," where the smaller firms tended to be the ones that said, you know, "We want the money faster."

And what they then, in response to our requests for comments and proposed amendments came up with, a solution that within 30 days of the end of the deal, 70% of the commissions will be returned. But then you do get an extra 60 days, the 90 days before the last 30% has to be returned because generally the fees and expenses aren't more than 30%. So, if there's anything left, then they'll distribute that out. So, there's something that we led on, changed the way this multi, multi-billion-dollar market does business in a way that I think benefits everybody. Although we have this corporate financing committee that was very involved in this. And our Chairman at one point said a successful negotiation is one where nobody gets everything they want.

13:37 - 13:47

Kaitlyn Kiernan: Yeah, that's a great story. What kind of information would you like to hear from industry participants during the comment period for this latest Reg Notice?

13:47 - 15:10

Joe Price: Everything's on the table. In fact, the Request for Comment talks about our rules, but also our operations, our administrative processes, should they be updated? But this is wide open. This isn't just about those programs. It's all our programs that impact capital formation and the requirements. We also have been talking today about investor protections, but costs and benefits and burdens that may be unnecessary, unforeseen impacts. We're really genuinely open to whatever we may hear. FINRA is a self-regulatory organization, so what I've seen in my experience here is you don't get, often, people who say, "Do away with all these rules," or "Do away with these rules, do away with those rules," because everybody benefits if there's not scandal, if there's not fraud, if there's not manipulation. And so, in my experience, when I'm out talking to members, they appreciate that rules have a role and an important role in keeping everybody honest, and that benefits everybody. And I'll listen to any comments coming in but of course, we always have to keep in mind our raison d'etre of investor protection. So, we're always going to look at comments through that lens. But we really are open to all the ideas that come in.

15:11 - 15:18

Kaitlyn Kiernan: And is there anything that maybe didn't make it into the Reg Notice that's worth sharing with our listeners?

15:18 - 16:35

Joe Price: One thing that we didn't talk about today, it is mentioned briefly in the Notice, but we're meeting soon with the SEC on, there's a way to raise capital called Regulation A that the SEC redid. It's designed for smaller issuers. You can raise up to $75 million, but it hasn't been utilized very much since the SEC adopted it. They have to be filed with FINRA, they're filed simultaneously with FINRA and the SEC. So, we're doing roundtables with members and we're going to meet with the SEC and talk to them about it to see if there's ways that our rules that apply to this particular capital raising process should be or could be changed that would encourage more firms to utilize that method of raising capital. These days you have platforms that are offering shares and often they have Reg D offering, they've got a funding portal offering and then they've got a Reg A offering. And so, we want to see if there's a way that we can, as they stay consistent with investor protection, try to make Regulation A something that has more firms involved in.

16:36 - 16:45

Kaitlyn Kiernan: Great to know. So, just to wrap up, can you remind our listeners when comments are due for Reg Notice 23-09?

16:45 - 16:59

Joe Price: Yes. Comments must be received by August 7th, 2023. If you're a couple of days late, send in your comments anyway. Very anxious to see them and to respond to them.

16:59 - 17:08

Kaitlyn Kiernan: Great. And if a listener has some questions, maybe they want to ask or they want to have a conversation before submitting a comment, where can they go?

17:08 - 17:37

Joe Price: Well, Notice 23-09 is—and I do this pretty frequently—just type FINRA 23-09 into Google and it's right on the front page of the Notice. It's got a list of people and their contact information. The top person on the list is me, but also two of my colleagues, Jim Wrona and Matt Vitek, who've been very involved and who are in the General Counsel's office are also there. So, any one of the three of us is the right contact.

17:38 - 18:10

Kaitlyn Kiernan: Great. Well, thank you, Joe. And we will also have a link to the Reg Notice in our show notes for easy access. But Joe, thank you so much for joining me to run through Reg Notice 23-09 and the role of the capital formation process in our capital markets. Listeners don't forget that comment period closes August 7th. And don't forget, you can subscribe to FINRA Unscripted wherever you listen to podcasts. Today's episode was produced by me, Kaitlyn Kiernan, engineered by John Williams and coordinated by Hannah Krobock. Until next time.

18:10 – 18:15

Outro Music

18:15 - 18:43

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