Who is an Unregistered Broker, Anyway?
What is a Broker? Section 3(a)(4)(A) of the Exchange Act defines a “broker” as a person “engaged in the business of effecting transactions in securities for the account of others.” SEC releases and no-action letters identify the factors used to determine whether a person is required to register as a broker.
What is Section 15(a)? Section 15(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) makes it unlawful for a “broker” or “dealer” to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security other than an exempted security unless such broker or dealer is registered with the SEC. States have Also Adopted laws regulating broker-dealer activity.
What Conduct Indicates Broker-Dealer Activity?
Receiving transaction-based compensation; Regularly participating in the offer and sale of securities; Assisting an issuer to structure securities transactions; Identifying potential investors; Soliciting securities transactions; engaging in negotiations with investors; Participating in order-taking in a securities offering; and Previous securities registration and/or disciplinary actions. Holding oneself out as a broker;
What is Transaction-Based Compensation? ďƒ˜ Compensation contingent upon the success of the sale of securities is the most important factor in determining broker activity; ďƒ˜ If transaction-based compensation is paid, the SEC will most likely find other factors.
What Constitutes Significant Contacts with Investors? Even in the absence of transaction-based compensation, there are certain activities that could cause someone to be deemed an unregistered broker, including: ● ● ● ●
Engaging in negotiations with the potential investors and the issuer; Providing offering documents and marketing materials to investors; Making recommendations to potential investors regarding an investment; and Advising potential investors on the merits of an investment.
What Can Finders Do? If a finder does not receive transaction-based compensation and does not have significant contacts with investors, the finder can engage in the following activities without registration as a broker: Assist the issuer in determining the terms of the offering; Provide investor names and contact information to the issuer; help prepare private placement memorandums and other offering materials; provide and prepare market and financial analyses and feasibility studies; advise issuer about potential financing and recommend methods of financing; and advise on the administrative work involved in a securities offering. Receive a fixed fee or hourly-based compensation that is reasonably related to the services provided that is not contingent upon an investment being made.
What is the Associated Persons’ Safe Harbor? Rule 3a4-1 of the Exchange Act provides a non-exclusive safe harbor from the broker-dealer registration requirements for an “associated person” of the issuer. An associated person is a natural person who is a partner, officer, director, or employee of: the issuer; a corporate general partner of a limited partnership that is an issuer; a company or partnership that controls, is controlled by, or is under common control with, the issuer; or an investment adviser registered under the Investment Advisers Act of 1940 to an investment company registered under the Investment Company Act of 1940 which is the issuer.
How Does an Associated Person Qualify for the Safe Harbor? the individual must meet all three of the preliminary conditions below: The individual must not be subject to a statutory disqualification; The individual must not, at the time of his participation in the offer, be an associated person of a broker or dealer; and The associated person must not be compensated in connection with the sale of the issuer’s securities by the payment of commissions or other remuneration based either directly or indirectly on transactions in securities. In determining whether payment of salary or a bonus satisfies this standard, all of the facts and circumstances of the compensation arrangement should be considered.
What Factors Determine if a Bonus is Permissible? Relevant factors in determining whether the payment of a bonus is permissible include: when the offering commences and concludes; when the employee’s bonus is paid; when it is determined that the employee’s bonus will be paid; when associated persons are informed of the issuer’s intention to pay a bonus; and • whether the bonus paid to a particular associated person varies with their success in selling the issuer’s securities. • • • •
What Are the Additional Conditions of the Safe Harbor? to qualify for the safe harbor, the individual must also meet one of the three conditions below: 1.
Sales Restricted to Certain Classes of Purchasers or Certain Transactions: This applies where sales of the issuer’s securities are made in any one of the following four ways: a)
The sales are to a registered broker or dealer; a registered investment company (or registered separate account); an insurance company; a bank; a savings and loan association; a trust company or similar institution supervised by a state or federal banking authority; or a trust for which a bank, a savings and loan association, a trust company, or a registered investment adviser either is the trustee or is authorized in writing to make investment decisions.
b) The securities are exempted securities by reason of section 3(a) (7), 3(a)(9) or 3(a)(10) of the Securities. These exemptions include bankruptcy exchanges, issuer exchanges, and court- or agencysupervised exchanges. c) The sales are made pursuant to a plan or agreement submitted for the vote or consent of the security holders who will receive securities of the issuer in connection with a reclassification of securities of the issuer, a merger or consolidation or a similar plan of acquisition involving an exchange of securities, or a transfer of assets of any other person to the issuer in exchange for securities of the issuer. d) The sales are made pursuant to a bonus, profit-sharing, pension, retirement, thrift, savings, incentive, stock purchase, stock ownership, stock appreciation, stock option, dividend reinvestment or similar plan for employees of an issuer or a subsidiary of the issuer.
Condition 2 to Safe Harbor 2. Duties Are Limited in Frequency and Proportion. Under this exception, three conditions must be satisfied: Â
a) The associated person primarily performs or is intended primarily to perform at the conclusion of the offering substantial duties for or on behalf of the issuer otherwise in connection with transactions in securities. b) The associated person was not a broker or dealer, or an associated person thereof, within the prior 12 months. c) The associated person does not participate in selling a securities offering more than once every 12 months other than in reliance on the other two exceptions in 2(a) and (b) above.
Condition 3 to Safe Harbor 3. Passive Duties: This exception applies where the associated person restricts his or her activities to any one or more of several specified types of selling activities, each of which is “passive� or restricted in nature: a)
Preparing any written communication or delivering such communication through the mails or other means that does not involve oral solicitation by the associated person of a potential purchaser; Provided, however, that the content of such communication is approved by a partner, officer or director of the issuer.
b)
Responding to inquiries of a potential purchaser in a communication initiated by the potential purchaser if the content of such responses are limited to information contained in a registration statement filed under the Securities Act or other offering document.
Condition 3 to Safe Harbor - Continued c)
Performing ministerial and clerical work in any transaction. An issuer that permits unregistered directors, officers, employees or other associated persons to participate in the offer or sale of its securities outside the safe harbor afforded by Rule 3a4-1 is at risk for the offering being subject to rescission by investors whose purchases were induced by such unregistered persons.
For further information about the rules & regulations that apply to investor relations activity, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton Florida, (561) 416-8956, info@securitieslawyer101.com or visit www.securitieslawyer101.com. Please note that the prior results discussed herein do not guarantee similar outcomes. Hamilton & Associates | Securities Lawyers Brenda Hamilton, Securities Attorney 101 Plaza Real South, Suite 202 North Boca Raton, Florida 33432 Telephone: (561) 416-8956 Facsimile: (561) 416-2855 www.SecuritiesLawyer101.com
For more information about our publications please visit the links below: A+ Offerings
Going Public Lawyers
A+ Reporting
Going Public Transactions
About Brenda Hamilton
Jobs Act 101
Accredited Investor Status
Initial Public Offerings
Crowdfunding
Intrastate Crowdfunding
Crowdfunding Portals
Investor Relations 101
Direct Public Offering
IPO Alternatives
Direct Public Offering Attorneys
DTC Chills
OTC Link
Draft Registration Statements
Manipulative Trading
What is a Form 10 Registration Statement? What is DTC Eligibility? What is a Form S-8 Registration Statement? What is Form 12b-25? What are the OTC Markets OTC Pinks? What Is Regulation SHO?
What Is A Confidential Registration Statement What Are The OTC Markets?
DTC Eligibility
OTC Markets
DTC Global Locks
OTC Markets Attorney
Due Diligence
OTC Markets Dual Listings
Social Media Schedule 14C
Secondary Registration Statement Schedule 14A
EB-5 Program & Going Public
OTC Pink Sheets
Eligibility & Regulation A+
OTCQB Listing, Eligibility, Quotation
Form S-3 Registration Statement
OTCQX Listing, Eligibility, Quotation
Short Sales Sponsoring Market Makers
Spam
Form S-8 Registration Statement
Periodic Reporting
Funding Portals
Private Placements
Global Locks
Registered Direct Public Offerings
Stock Scalping 101
Going Public Attorney
Regulation D
Equity Crowdfunding FINRA Rule 6490
Go Public 101
Regulation A+
Stock Promotion
Exempt Direct Public Offerings
Going Public Bootcamp
Regulation D Bad Actors
Going Public for Foreign Issuers
Restrictive Legends
Going Public Law
Reverse Mergers
Forensic Attorneys Form 10 Registration Statement
Form 1-A
Regulation A+ Disclosures
Reverse Merger Game Changers
Regulation A+ Q&A
Reverse Stock Splits
Regulation A+ SEC Reporting
Rule 10b-5
Form 10-K Wells Notices
Reverse Mergers 101Schedule 14A
Rule 15c-211
Schedule 14C
Rule 504
Spam
Rule 506(c)
Sponsoring Market Makers
SEC Comments
Twitter & Regulation A+ What is Going Public?
What Is Accredited Crowdfunding?