Guide to 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”)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:
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.