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SEC Issues Guidance Regarding The Exemption From Broker-Dealer Registration In Title II Of The JOBS Act


Title II of the JOBS Act, requires the SEC to amend Rule 506 of Regulation D to permit general solicitation and advertising in offerings under Rule 506, provided that all purchasers of the securities are accredited investors and such accredited status is reasonably verified by the Issuer.

In addition, Title II creates a limited exemption to the broker dealer registration requirements for certain intermediaries that facilitate these Rule 506 offerings.  In particular, new Section 4(b) to the Securities Act of 1933, has added a new exemption to the broker dealer registration requirements for:

(A) a person that  maintains a platform or mechanism that permits the offer, sale, purchase, or negotiation of or with respect to securities, permits general solicitations, general advertisements, or similar related activities by issuers of such securities, whether online, in person, or through any other means

(B) that person or any person associated with that person co-invests in such securities; or

(C) that person or any person associated with that person provides ancillary services with respect to such securities.

Ancillary services are defined in the JOBS Act as (A) the provision of due diligence services, in connection with the offer, sale, purchase, or negotiation of such security, so long as such services do not include, for separate compensation, investment advice or recommendations to issuers or investors; and (B) the provision of standardized documents to the issuers and investors, so long as such person or entity does not negotiate the terms of the issuance for and on behalf of third parties and issuers are not required to use the standardized documents as a condition of using the service.

Finally, the exemption from registration as a broker or dealer also requires that such person and each person associated with such person (A) receives no compensation in connection with the purchase or sale of the security; (B) does not have possession of customer funds or securities in connection with the purchase or sale; and (C) is not subject to statutory disqualification pursuant to Section 3(a)(39) of the Exchange Act (i.e. bad boy provisions).

SEC Guidance

On February 5, 2013 the SEC issued guidance, via frequently asked questions, regarding the exemption from broker-dealer registration under Title II. Interestingly, the SEC clarifies that the exemption from broker-dealer registration does not require the drafting or enactment of any rules and accordingly was effective upon signing of the JOBS Act in April 2012 and is fully operational.  Of course, the intermediary cannot assist in an offering involving general solicitation until the rules allowing such offerings have been finalized, but intermediaries can set up shop, build websites and develop relationships in the interim.

The last question and answer in the SEC guidance may be of the most significance, the SEC confirms that the broker dealer exemption does not pre-empt state law and accordingly, persons acting in reliance on the new exemption, must also confirm compliance with any and all applicable state securities regulations.  State securities laws vary widely, including the laws related to broker dealer registration.  I have not researched the various state laws on this issue, but think it would be a mistake to underestimate how this will impact the practical application of the new exemption.

Although the new statutory language appears self evident, the SEC confirms that the exemption applies to websites and social media sites as exempt platforms.

Although the SEC states that it interprets “compensation” very broadly to include any economic benefit, it notes that Congress specifically allowed for co-investing and accordingly, profits from such co-investments would not be considered compensation to disqualify this broker dealer registration exemption.

In addition, not only is it permissible for a venture capital fund or its adviser to operate a website where it lists offerings of securities by potential portfolio companies, co-invests in those securities with other investors, and provides standardized documents, the SEC believes that this very scenario shall dominate the use of the exemption.  The SEC states, “[A]s a practical matter, we believe that the prohibition on compensation makes it unlikely that a person outside the venture capital area would be able to rely on the exemption from broker-dealer registration.”

Reliance on the exemption in Section 4(b) is not limited to use by any type of person, as long as they follow the rules, including not receiving compensation in association with the sale of securities.  Persons associated with issuers, including officers, directors and employees, can rely on the exemption and create websites advertising Rule 506 offerings.

On the other hand, if a privately offered fund, or syndicate of privately offered funds, pays a salary to an internal marketing person to operate such a website or platform, that person would be deemed to receive compensation and would not be able to rely on the new exemption.  The SEC goes further to note that they are of the view that persons who market interests in private funds may be subject to the broker dealer registration requirements found in Section 15(a)(1) of the Exchange Act.

On a technical note, the SEC confirms that the exemption is not an exclusion from the definition of broker dealer.  Platforms and intermediaries operating under the new Section 4(b) may (and most likely are) broker dealers, they are just exempted from registering as such.

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys

Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

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