Articles Posted in Broker-Dealers

As previously noted in this blog (see “Private Placement Brokers Await Attention by SEC” June 6, 2017) and in this firm’s sister blog (see “Private Placement Brokers Should be Legalized along with M&A Brokers” in the RIA Compliance Blog, Jan. 21, 2015), there has long been a large gray market of unregistered private placement brokers. Also see “Report and Recommendations of the Task Force on Private Placement Broker-Dealers” (American Bar Association Business Law Task Force, 2005). This cadre, often call themselves “finders,” in the vain hope that such self-description will enable them to escape regulation as a securities Broker/Dealer, which they clearly are by definition. Finders have continued to operate in plain sight, with little response from the SEC other than the issuance of a few inconsistent no-action letters and an occasional enforcement action against such brokers whose conduct was egregious in other ways.

Hester Peirce, the newest Republican commissioner at the SEC, has called on the agency to address this malfunction in our securities laws at a recent Practicing Law Institute program. Commissioner Peirce proposes establishing a new regulatory scheme for finders in small business capital formation transactions that “works for them.” We would hasten to add that any solution to this problem must also work for the small businesses that use finders and those that invest through finders.

Congress has previously approached the comparable problem of M&A Brokers by establishing an exemption rather than a new regulatory structure. We would urge the Commission to explore a similar approach to finders before creating an entire new regulatory scheme and the bureaucracy to operate that scheme. Such an exemption must create protections for both investors and the businesses raising capital, such as a prohibition on the finder taking possession of the investment or making any representations that were not contained in a written Private Placement Memorandum approved by the issuer. The process of developing any such regulatory scheme or exemption will hopefully involve active participation by persons who participate in this market.

As previously noted in this firm’s sister blog (see “Private Placement Brokers Should be Legalized along with M&A Brokers” in the RIA Compliance Blog, Jan. 21, 2015), there has long been a large gray market of unregistered private placement brokers. Also see “Report and Recommendations of the Task Force on Private Placement Broker-Dealers” (American Bar Association Business Law Task Force, 2005). This cadre, often calling themselves “finders,” have continued to operate in plain sight, with little response from the SEC other than the issuance of a few inconsistent no-action letters and an occasional enforcement action against such brokers whose conduct was egregious in other ways.

The SEC’s Advisory Committee on Small and Emerging Companies (the “Committee”) has twice weighed-in on this subject urging SEC action.

The Committee first reported on this subject September 23, 2015, noting that: