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SERIES 7 | SERIES 24 | FINANCIAL REGULATION COURSES
FINRA Rule 4518 requires member firms to notify FINRA before engaging for the first time in any transaction involving the offer or sale of securities in reliance on Section 4(a)(6) of the Securities Act of 1933, and within thirty days of coming under common control with, or directly or indirectly controlling, a funding portal.
The rule is deliberately spare — two notification triggers, no substantive conduct requirements of its own — because its function is administrative rather than substantive: it is the mechanism through which FINRA obtains advance visibility into member firms entering the crowdfunding intermediary space so that its examination and oversight programs can be appropriately calibrated.
The substantive conduct obligations that apply to member firms and funding portals engaged in crowdfunding are found elsewhere — in the FINRA Funding Portal Rules, in the SEC's Regulation Crowdfunding, in FINRA Rule 2310 (suitability), and in the broader conduct framework that governs all securities offerings by broker-dealers.
Rule 4518 sits within the 4500 Books, Records and Reports section of the 4000 Financial and Operational Rules series. It was adopted by SR-FINRA-2015-040, effective January 29, 2016, the same date on which Regulation Crowdfunding's operative provisions first became effective and on which FINRA's companion Funding Portal Rules first applied. Regulatory Notice 16-07 announced the rule's adoption and its effective date.
Regulatory Notice 16-06 simultaneously announced the adoption of FINRA's Funding Portal Rules, which govern the separate class of FINRA-regulated intermediaries — funding portals — that operate within the Regulation Crowdfunding framework. The rule has not been amended since its January 2016 adoption. It occupies a unique position in the FINRA rulebook as the only rule directly implementing the crowdfunding intermediary framework created by the Jumpstart Our Business Startups Act of 2012 — one of the most significant expansions of securities exemption law in decades.
The Jumpstart Our Business Startups Act of 2012 — the JOBS Act — was Congress's most ambitious attempt in a generation to expand access to capital for small businesses and startups by relaxing certain registration and disclosure requirements of the federal securities laws.
Title III of the JOBS Act, formally titled the Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act — the CROWDFUND Act — added Section 4(a)(6) to the Securities Act of 1933, creating a new registration exemption for securities offerings made through the crowdfunding mechanism it defined.
Prior to the JOBS Act, the prohibition on general solicitation in Regulation D offerings and the registration requirements of the Securities Act effectively precluded startups from raising equity capital from large numbers of small, unaccredited investors through online platforms.
The small investor population that might collectively fund a promising startup through contributions of a few hundred or a few thousand dollars each was simply unreachable under the prior legal framework.
The CROWDFUND Act changed this by creating a framework under which issuers could raise securities capital from a broad base of investors — accredited and non-accredited alike — through specifically regulated online intermediaries, subject to individual investment limits, issuer disclosure requirements, and mandatory intermediary oversight.
The SEC's implementing rules — Regulation Crowdfunding, codified at 17 CFR Part 227 — were adopted in October 2015 and became effective May 16, 2016. The original Regulation Crowdfunding limited issuers to raising no more than one million dollars in any twelve-month period through Section 4(a)(6) offerings and imposed individual investor limits based on the lesser of annual income or net worth.
In March 2021, the SEC adopted significant amendments to Regulation Crowdfunding through the Amendments for Regulation Crowdfunding and Regulation A, published in Securities Exchange Act Release No. 89041, which among other changes raised the maximum offering amount from $1.07 million to $5 million per twelve-month period — substantially expanding the practical utility of the crowdfunding exemption for growing companies.
The investor limits were simultaneously adjusted to reflect the higher offering cap, providing that investors with annual income or net worth below $107,000 may invest the greater of $2,200 or five percent of the lesser of their annual income or net worth, while investors at or above those thresholds may invest up to ten percent of the lesser of their annual income or net worth, subject to a maximum of $107,000 in any twelve-month period across all crowdfunding offerings.
Rule 4518(a) addresses the first notification trigger — the broker-dealer's initial entry into Regulation Crowdfunding intermediary activity. A member must notify FINRA prior to engaging, for the first time, in any transaction involving the offer or sale of securities in reliance on Section 4(a)(6).
The pre-transaction notification requirement reflects the advance-notice philosophy that applies to other significant new business activities under the FINRA rulebook — FINRA needs to know before the activity begins, not after.
The practical mechanism for this notification is through the Firm Gateway using the process FINRA has prescribed, which includes providing information about the nature of the crowdfunding activities the member intends to conduct, the platforms it intends to use or operate, and other relevant details FINRA may request.
The phrase for the first time is significant and operates as a one-time trigger. A member that has already notified FINRA and commenced Regulation Crowdfunding activity under Section 4(a)(6) is not required to re-notify for each subsequent offering.
The obligation is to provide advance notice of initial entry into this category of business — not an offering-by-offering disclosure obligation. However, material changes in the nature of the crowdfunding business — such as a broker-dealer that initially participated as an intermediary in a modest volume of Regulation Crowdfunding offerings and subsequently establishes or acquires a dedicated crowdfunding platform — may constitute new business activity warranting supplemental notification under FINRA Rule 4517's general filing obligation or under FINRA's new membership application provisions.
Rule 4518(b) addresses the second notification trigger — a member's acquisition of a controlling relationship with a funding portal. Funding portals are a distinct category of SEC-registered intermediary created specifically for Regulation Crowdfunding — they are not broker-dealers, cannot hold investor funds or securities, and are more limited in the activities they may conduct than broker-dealers.
However, they are required to register with FINRA as funding portal members and are subject to FINRA's Funding Portal Rules.
The relationship between a broker-dealer member and a funding portal under common control creates a complex overlap between two different regulatory frameworks, and Rule 4518(b) ensures that FINRA learns of any such relationship promptly. Within thirty days of directly or indirectly controlling, being controlled by, or coming under common control with a funding portal, the member must notify FINRA.
The thirty-day post-event notification for the funding portal affiliation trigger differs from the pre-event notification for the first Regulation Crowdfunding transaction. The difference reflects the practical reality that a member may not always know in advance when a control relationship with a funding portal is being established — for example, where a corporate restructuring within a larger financial services group results in a FINRA member and a funding portal coming under common ownership — whereas the decision to participate as a Regulation Crowdfunding intermediary for the first time is always a deliberate, anticipatable business decision.
As of the end of 2024, there were eighty-three SEC-registered funding portals that were FINRA funding portal members. The market has been dominated by funding portals rather than broker-dealers, with funding portals involved in approximately ninety percent of all Regulation Crowdfunding offerings since Regulation CF became operative in May 2016. The five largest intermediaries — based on number of offerings — accounted for approximately seventy percent of all initiated offerings and approximately seventy-five percent of offerings reporting proceeds, reflecting significant concentration in the intermediary market.
The overall Regulation Crowdfunding market has seen meaningful turnover among funding portals, with a number of early entrants having ceased operations, been acquired, or surrendered their registrations. Broker-dealer participation in Regulation Crowdfunding intermediary activity has been relatively modest compared to funding portals, though it has grown as established broker-dealers have recognized the capital formation opportunities in the small business sector.
The SEC's March 2021 amendments that raised the maximum offering amount to five million dollars substantially changed the economics of broker-dealer participation in Regulation Crowdfunding. Under the original one million dollar cap, the compliance costs of maintaining a full Regulation Crowdfunding program were difficult to justify for most broker-dealers.
The five million dollar cap makes larger, more commercially meaningful offerings feasible for established issuers, which in turn makes broker-dealer intermediary participation more attractive as a revenue opportunity. This expansion of the practical market for Section 4(a)(6) offerings means that the pool of broker-dealers for which Rule 4518's notification obligation is relevant has grown since the rule's 2016 adoption.
FINRA has made crowdfunding intermediary compliance a recurring examination priority in its Annual Regulatory Oversight Reports across 2024, 2025, and 2026. Both the 2024 and 2025 FINRA Annual Regulatory Oversight Reports specifically address the Crowdfunding Offerings: Broker-Dealers and Funding Portals topic, identifying examination findings and effective practices in this area.
Common examination findings for broker-dealer members engaged in Regulation Crowdfunding intermediary activities have included failures to conduct adequate issuer due diligence before hosting or participating in a Regulation Crowdfunding offering, deficiencies in the investor communication and disclosure obligations required by Regulation Crowdfunding, inadequate procedures for monitoring investment limits on a per-investor basis, failures to detect or respond to material changes in issuer circumstances during the offering period, and inadequate written supervisory procedures specifically addressing the crowdfunding business line. For funding portals, FINRA's examination findings have included similar due diligence deficiencies, failures to meet the escrow and investor fund protection requirements of Regulation Crowdfunding, and inadequate procedures for investor suitability assessment within the investment limit framework.
FINRA has also emphasized the investor protection concerns specific to Regulation Crowdfunding — particularly the risk that retail investors without sophisticated financial analysis capabilities may invest in highly speculative early-stage companies through crowdfunding platforms without fully understanding the risks of illiquidity, the likelihood of failure among startup ventures, and the limitations on secondary market trading for Regulation Crowdfunding securities during the twelve-month holding period following initial sale.
While Rule 4518 itself imposes only the notification obligation, the broader Regulation Crowdfunding framework imposes substantial substantive obligations on member firms that serve as intermediaries under Section 4(a)(6). These obligations derive from SEC Regulation Crowdfunding — 17 CFR Part 227 — and from the existing FINRA conduct rules that apply to all broker-dealer activities.
Under Regulation Crowdfunding, a broker-dealer intermediary must register each offering on its platform with the SEC on Form C, must provide investors with educational materials explaining the nature and risks of crowdfunding investments, must implement investor investment limit compliance procedures, must maintain the platform as an online-only venue that cannot conduct transactions in person or by telephone, must hold investor funds in escrow until the offering target is met, must conduct reasonable due diligence on each issuer including review of available information about officers, directors, and twenty percent or more shareholders, must have a reasonable basis for believing the issuer has established means to keep accurate records of investors, and must provide investors with certain information before the closing of each offering.
These substantive obligations, together with the general conduct requirements of FINRA Rule 2010, FINRA Rule 2020, and the customer protection framework broadly, create a comprehensive compliance structure for broker-dealers operating as Section 4(a)(6) intermediaries that goes well beyond the single notification obligation of Rule 4518. Written supervisory procedures under FINRA Rule 3110 must specifically address all aspects of the Regulation Crowdfunding business line including issuer due diligence standards, investor communication procedures, investment limit monitoring, escrow management, and the coordination between the broker-dealer's registered activities and any affiliated funding portal's operations.
A member that has provided the Rule 4518(a) pre-transaction notification and commenced Regulation Crowdfunding intermediary activity must have written supervisory procedures under FINRA Rule 3110 that specifically address the crowdfunding business. Those procedures should address the issuer due diligence process including the background check requirements for issuer principals, the investor communication and disclosure obligations under Regulation Crowdfunding, the procedures for monitoring investor investment limits across all offerings on the platform, the escrow arrangement for investor funds pending offering completion, the procedures for handling offering cancellations and investor refunds, and the supervisory review process for monitoring ongoing compliance with all applicable Regulation Crowdfunding requirements.
For members that have provided the Rule 4518(b) notification regarding an affiliated funding portal, the WSPs should address the governance and operational boundaries between the member's broker-dealer activities and the funding portal's activities, the procedures for ensuring that the funding portal's activities remain within the more limited scope permitted for funding portals rather than broker-dealers, and the process for identifying and managing any conflicts of interest arising from the common control relationship.
FINRA Rule 4518 is tested on the Series 7 General Securities Representative examination in the context of capital raising exemptions, JOBS Act provisions, and the regulatory obligations of broker-dealers participating in crowdfunding offerings. The Series 24 General Securities Principal examination tests the rule in the context of new business activity notification obligations and the supervisory framework for crowdfunding intermediary activities. The rule's connection to Section 4(a)(6) of the Securities Act and the Regulation Crowdfunding framework makes it relevant to any examination covering securities registration exemptions and alternative capital formation mechanisms.
The key points to retain are these: FINRA Rule 4518 requires broker-dealer members to notify FINRA in the manner FINRA prescribes prior to engaging for the first time in any transaction involving the offer or sale of securities in reliance on Section 4(a)(6) of the Securities Act — the Regulation Crowdfunding exemption created by Title III of the JOBS Act of 2012; this pre-transaction notification is a one-time obligation triggered by initial entry into the Section 4(a)(6) intermediary business, not an offering-by-offering requirement; members must also notify FINRA within thirty days of directly or indirectly controlling, being controlled by, or coming under common control with a funding portal as defined under SEC Regulation Crowdfunding Rule 300(c)(2); funding portals are a distinct category of SEC-registered FINRA-member intermediary created specifically for Regulation Crowdfunding that cannot hold investor funds or securities and are more limited in permitted activities than broker-dealers; the maximum amount an issuer may raise through Section 4(a)(6) in any twelve-month period is currently five million dollars following the SEC's March 2021 amendments to Regulation Crowdfunding — raised from the original one million dollar cap; as of end of 2024 there were eighty-three FINRA-member funding portals, with approximately ninety percent of all Regulation Crowdfunding offerings conducted through funding portals rather than broker-dealers and with significant market concentration among the five largest intermediaries; FINRA's 2024, 2025, and 2026 Annual Regulatory Oversight Reports all identify crowdfunding intermediary compliance as an examination priority with findings centered on issuer due diligence, investor communication obligations, investment limit monitoring, and supervisory procedure adequacy; and written supervisory procedures under FINRA Rule 3110 must specifically address all aspects of the crowdfunding business line for any member that has notified FINRA under Rule 4518(a) or (b).
