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This post is not written for the business owners, but
rather for the consultants who connect companies that are looking to raise
capital with potential investors, whether angels or VCs. I was recently
reviewing the broker-dealer definitions in the Securities Exchange Act of 1934,
and decided to highlight a part of a definition of a broker that may not be
well known or understood by some.
Section 3(a)(4)(A) of the Exchange Act defined "broker" very broadly as "any
person engaged in the business of effecting transactions in securities for the
account of others." Depending on various factors, some of which I discuss
below, the definition includes (among others) business brokers or finders, who
find investors (venture capital, angel) for companies issuing securities, even
if in "consultant" category; find buyers or sellers of businesses; act as
investment advisers and financial consultants or act as "placement agents" for
private placements of securities.
In order to determine whether you are a broker, the Securities and Exchange
Commission (SEC) recommends looking at these factors (if answer is "yes" to any
of the questions below, then it is likely that you are a broker):
• Do you participate in important parts of a securities transaction, including
solicitation, negotiation, or execution of the transaction?
• Does your compensation for participation in the transaction depend upon, or
is it related to, the outcome or size of the transaction or deal? Do you
receive trailing commissions, such as 12b-1 fees? Do you receive any other
• Are you otherwise engaged in the business of effecting or facilitating
• Do you handle the securities or funds of others in connection with securities
For example, the SEC recently denied no-action relief to a law firm that
intended to help its client raise funds by introducing it to potential
investors. The law firm was to be compensated based on a percentage
of the gross amount the client raised as a result of the law firm's
introductions. See Brumberg, Mackey & Wall, PLC, May 2010. The SEC staff
stated in its response that "a person's receipt of transaction-based compensation
in connection with these activities is a hallmark of broker-dealer activity."
If you think that you may be a broker, you should consult with a private
counsel or the SEC to determine whether you need to register. You cannot engage
in the securities business until the registration is complete. A broker
typically needs to register with the SEC. There is a number of exceptions to
this rule, one of which is if the broker conducts all of his business in one
state (then, registration with the state authorities is in order). However,
since a lot of information is posted on the internet and is accessible to
persons from any state, a broker may need to register federally as well.
Federal registration process involves filing form BD with the SEC, becoming a member
of a self-regulatory organization (such as FINRA or a registered national
securities exchange), becoming a member of the Securities Investor Protection
Corporation and complying with all applicable state requirements. States
require separate registrations.
Certain brokers may also need to register as investment advisers under the
Investment Advisers Act. An investment adviser is a person who receives
compensation for providing advice about securities as part of a regular
business. Registration as an investment adviser involves filing a form ADV
(check the recent amendments adopted in October 2010!) with the SEC or the
state authorities depending on the amount of capital under management and the
number of clients in a state.
In conclusion, it is important to reiterate that none of this should be
considered as legal advice. I wrote this blog for information purposes only, as
a reference for business consultants who may or may not be required to register
as brokers in their states or federally.
Read more commentary from Arina Shulga on the
legal aspects of operating new and growing businesses at Business Law Post.