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The legal world is patiently waiting for the
Securities and Exchange Commission (the "SEC") to enact rules implementing
Title II of the JOBS Act. One of the recent developments in this field is
the issuance by the SEC Staff of frequently asked questions (FAQs) regarding the broker-dealer registration exemption
found in Section 201(c) of Title II of the JOBS Act that adds a new paragraph
(b) to Section 4 of the Securities Act.
Generally, intermediaries are required to register with
the SEC as broker-dealers when they are engaging in certain matchmaking
activities between the issuers and the investors. This
Guide provides an overview of the activities that may require registration
as a broker-dealer. The JOBS Act introduced an exception to this general rule when
it directed the SEC to eliminate the ban on general solicitation and
advertising for Rule 506 offers and sales where all investors are
accredited. The exemption is very limited and applies only in Rule 506
offerings and only in the three circumstances listed below. So, according
to the new
Section 4(b) of the Securities Act, a person will not be required to
register as a broker-dealer solely because:
Importantly, such person may not receive compensation in
connection with the purchase or sale of such securities and may not have
possession of customer funds or securities in connection of such transactions,
and they are not subject to statutory disqualification.
What types of entities would be likely to rely on such
exemption? These would most likely be VC funds and their
advisers. Actually, the SEC Staff noted that the compensation
prohibition "makes it unlikely that a person outside the venture capital area
would be able to rely on the exemption from broker-dealer registration."
But practical use of this exemption still remains to be seen.
As I have previously written, the SEC had three months from April 5,
2012 to issue rules implementing the elimination of the ban on general
solicitation and advertising in Rule 506 offerings. However, such rules
have not yet been implemented, which means that the general solicitation and
advertising in Rule 506 offerings to accredited investors are not yet
permitted. Interestingly, the broker-dealer exemption addressed in Section
201 of the JOBS Act went into effect immediately upon adoption of the JOBS
To clarify the situation, on February 3, 2013 the SEC
issued the FAQ regarding this broker-dealer exemption. It
consists of 10 questions. Below is the summary:
1. The Staff
explained that although the exemption from broker-dealer registration contained
in Section 4(b) of the Securities Act is now in effect, the elimination of the
ban on general solicitation and advertising in Rule 506 offerings is not.
2. The scope of the
exemption is very narrow: it is only available in connection with the offerings
conducted under Rule 506 of Regulation D.
3. Persons who are
eligible for exemption can maintain an Internet website or a social media site
and still use the exemption (no need for a more formal portal).
4. Persons who want
to avail themselves of this exemption cannot be compensated in connection with
the purchase or sale of these securities. Here, the Staff interprets
"compensation" broadly to include direct or indirect economic benefits.
5. The exemption
permits co-investing in the securities offered by the platform. Any economic
or financial benefits derived from such investments are not considered
6. Someone who is
associated with the issuer can maintain a platform to sell the issuer's
securities, as long as no compensation is paid in connection with the purchase
or sale of these securities.
7. The exemption in
Section 4(b) does not exempt from state registration requirements.
8. The exemption is
not an exclusion from the definition of the term "broker" or "dealer", so some
federal securities laws would still apply to the exempt persons regardless of
The adoption of the SEC rules regarding the elimination
on the ban of general solicitation and advertising, coupled with this exemption
from broker-dealer registration, is set to drastically change the way Rule 506
offerings are conducted. All we have to do now is patiently wait for the
enactment of the SEC rules.
Read more commentary from Arina Shulga on the
legal aspects of operating new and growing businesses at Business Law Post.
This article is not a legal advice, and was
written for general informational purposes only.
Arina Shulga is
the founder of Shulga
Law Firm, P.C., a New York-based boutique law firm specializing in advising
individual and corporate clients on aspects of business, corporate, securities,
and intellectual property law.
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