Many companies offer Investor Relations (“IR”) services to public companies and related marketing services.
Such services generally will include assistance in the preparation and dissemination of press releases and stockholder communications. Services may also include, without limitation, consulting with the company’s management concerning marketing surveys, investor accreditation, availability to expand investor base, investor support, strategic business planning, broker relations, attendance at conventions and trade shows, review and assistance in updating a business plan, production of a corporate profile and fact sheets, personal consultant services, financial analyst and newsletter campaigns, conferences, seminars, printed media advertising design, newsletter production, electronic public relations campaigns, direct mail campaigns, placement in investment publications and press releases.
Provided that an IR firm restricts its services to those described above, it should be able to avoid registering as a Broker-Dealer or Investment Adviser. Nevertheless, IR firms must avoid violating other SEC rules and regulations; namely, Section 17 of the Securities Act of 1933 (the “Securities Act”) and Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”) and Rule 10b-5 thereunder.
Broker-Dealer Registration
A Broker is defined in Section 3(a)(4)(A) of the Exchange Act as any person engaged in the business of effecting transactions in securities for the account of others and, as such, is required to register pursuant to Section 15(a) of the Exchange Act.
The SEC’s Guide to Broker-Dealer Registration (the “Guide”) dated April 2008 lists the following examples of activities and factors where broker registration may be required:
- “finders,” “business brokers,” and other individuals or entities that engage in the following activities:
- Finding investors or customers for, making referrals to, or splitting commissions with registered broker-dealers, investment companies (or mutual funds, including hedge funds) or other securities intermediaries;
- Finding investors for “issuers” (entities issuing securities), even in a “consultant” capacity;
- Engaging in, or finding investors for, venture capital or “angel” financings, including private placements;
- Finding buyers and sellers of businesses (i.e., activities relating to mergers and acquisitions where securities are involved).
- investment advisers and financial consultants;
- foreign broker-dealers that cannot rely on Rule 15a-6 under the Act (discussed below);
- persons that operate or control electronic or other platforms to trade securities;
- persons that market real-estate investment interests, such as limited partnership interests, that are securities;
- persons that act as “placement agents” for private placements of securities;
- persons that market or effect transactions in insurance products that are securities, such as variable annuities, or other investment products that are securities;
- persons that effect securities transactions for the account of others for a fee, even when those other people are friends or family members;
- persons that provide support services to registered broker-dealers; and
- persons that act as “independent contractors,” but are not “associated persons” of a broker-dealer.
In order to determine whether any of these individuals (or any other person or business) is a broker, the SEC looks at the activities that the person or business actually performs. Some critical inquires include:
Does the company participate in important parts of a securities transaction, including solicitation, negotiation, or execution of the transaction?
Does the company’s compensation for participation in the transaction depend upon, or is it related to, the outcome or size of the transaction or deal?
Is the company otherwise engaged in the business of effecting or facilitating securities transactions?
Furthermore, many companies turn to outside sources, such as finders, to identify financing. A finder’s role can be varied, from assisting companies in identifying potential investors to providing consulting services to promoting the sale of a new issuance of securities. Essentially a “finder” is a person who assists a securities issuer in locating investors but is not registered as a broker-dealer under the Exchange Act. The problem lies in the status of finders as unregistered broker-dealers.
The following four factors weigh heavily in the SEC’s analysis of whether a finder is acting as an unregistered broker dealer:
- Commissions/Transaction-based compensation
- Making buy/sell recommendations & providing investment details
- History of selling securities
- Active in negotiations between the investor and the issuer
Agreements between an IR firm and a client company should detail the IR firm’s role; prohibit the IR firm’s involvement in presentations to investors, negotiation and structuring of the investment terms, analysis of the investor’s portfolio, or any other action that would likely fall within the broker-dealer scope; and avoid performance-based or transaction-based commissions, instead opting for a flat fee approach not based on performance.
Investment Adviser
The Investment Advisors Act of 1940 defines an Investment Advisor as follows:
Section 202(a)(11) “Investment adviser” means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities; but does not include (A) a bank. . .;(D) the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation. . .”
The underlying policy for the exemption for bona fide newspapers and publications rests in the First Amendment right to free speech. Many publications rely upon this exemption from registration. However, many of the publications that rely upon the exemption only publish reports by independent third party licensed investment advisors. It should be noted that large established publications, such as www.thestreet.com, are generally registered as investment advisors.
In addition, Section 17(b) of the Securities Act prohibits any person from publishing, giving publicity to, or circulating any notice, circular, advertisement, newspaper, article, letter, investment service or communication which describes a security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.
The provisions of Section 17(b) as well as the anti-fraud provisions of the Investment Advisors Act are applicable, regardless of the availability of an exemption to registration.
The IR FIRM can avoid registering as an Investment Adviser if it: (a) publishes a bona fide newspaper, news magazine or business or financial publication of general and regular circulation, and (2) satisfies the following requirements:
- the publication does not offer individualized advice attuned to any specific portfolio or to any investor’s particular needs;
- the publication is bona fide in that the publisher may not engage in trading activity in any securities that were the subject of advice or comment for a reasonable period of time before or after the publication;
- the publication is bona fide in that the publication may not contain information which is false or materially misleading;
- the publication is bona fide in that it must disclose any and all compensation received or any interest in the securities which are the subject of advice or comment;
- the publication is of general and regular circulation in that it is not timed to specific market activity or to events affecting or having the ability to affect the securities industry.
Nevertheless, IR Firms are still subject to the anti fraud provisions of the Exchange Act and all federal and state securities laws.
Section 17 of the Securities Act
Section 17 of the Securities Act, Fraudulent Interstate Transactions, provides:
a. It shall be unlawful for any person in the offer or sale of any securities by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, directly or indirectly÷
- to employ any device, scheme, or artifice to defraud, or
- to obtain money or property by means of any untrue statement of a material factor any omission to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
- to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
b. It shall be unlawful for any person, by the use of any means or instruments of transportation or communication in interstate commerce or by the use of the mails, to publish, give publicity to, or circulate any notice, circular, advertisement, newspaper, article, letter, investment service, or communication which, though not purporting to offer a security for sale, describes such security for a consideration received or to be received, directly or indirectly, from an issuer, underwriter, or dealer, without fully disclosing the receipt, whether past or prospective, of such consideration and the amount thereof.
A material fact, as referenced in Section 17(a)(2), exists when there is a substantial likelihood that a reasonable investor would consider it important to an investment decision.
Pursuant to Section 17(b), in the event that IR FIRM is paid to represent companies for which it disseminates press releases or other information, or displays such companies on its website, it must disclose the compensation arrangement with the company. Moreover, IR Firms should include the following in its disclaimer, as a minimum;
“Nothing on this web site should be construed as investment advice. This web site is not a solicitation to buy or sell and the information contained in the web site or in our other publications does not purport to be a complete analysis of the companies mentioned. The information and statistics shown have been obtained from sources IR FIRM believes reliable, including, but not limited to, the subject company’s reports. All information contained herein should be evaluated by an independent financial analyst. You should always investigate and fully understand all risks before investing. Although IR FIRM does not knowingly publish false information, it does not guarantee the accuracy or completeness of any information represented on this web site or in its publications. Information reported here is subject to change at any time, and changes may not be posted immediately. IR FIRM, and/or its officers, directors or employees may, from time to time, have a position in the securities represented on this web site.”
Section 10(b) of the Exchange Act and Rule 10b-5
Section 10, Regulation of the Use of Manipulative and Deceptive Devices, provides:
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or of the mails, or of any facility of any national securities exchange:
(b) To use or employ, in connection with the purchase or sale of any security registered on a national securities exchange or any security not so registered, any manipulative or deceptive device or any securities-based swap agreement (as defined in section 206B of the Gramm-Leach-Bliley Act), or contrivance in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
Rule 10b-5, Employment of Manipulative and Deceptive Devices, provides that it shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange,
- To employ any device, scheme, or artifice to defraud,
- To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or
- To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security
