Following the SEC’s proposed conditional exemption for finders (see HERE), the topic of finders has been front and center. New York has recently adopted a new finder’s exemption, joining California and Texas, who were early in creating exemptions for intra-state offerings. Also, a question that has arisen several times recently is whether an unregistered person can assist a U.S. company in capital raising transactions outside the U.S. under Regulation S. This blog, the second in a three-part series, will discuss finders in the Regulation S context.
It is very clear that a person residing in the U.S. must be licensed to act as a finder and receive transaction-based compensation, regardless of where the investor is located. The SEC sent a poignant reminder of that when, in December 2015, it filed a series of enforcement proceedings against U.S. immigration lawyers for violating the broker-dealer registration rules by accepting commissions in connection with introducing investors to projects relying on the EB-5 Immigrant Investor Program. From a securities law perspective, EB-5 investments are generally completed by relying on the registration exemption found in Regulation S. For more on Regulation S, see HERE.
In a typical EB-5 investment, a company goes through a process of having their project approved by the United States Citizenship and Immigration Services (USCIS) after which they prepare private placement offering documents and solicit investors in qualifying foreign countries, including China. Due to language and cultural barriers, the U.S. company generally employs the services of marketing agents or finders in the foreign country to help locate and communicate with potential investors. Those finders are generally paid a success-based transaction fee. In addition, U.S. companies often establish a relationship with a U.S.-based immigration attorney that speaks the same language as the potential investors. The enforcement actions were part of a larger SEC investigation into securities law violations, including unregistered broker-dealer activity and sometimes fraud, in connection with the EB-5 program. It is interesting to note that no off-shore or non-U.S. finders were, or have since been, charged with unlicensed broker activity unless the action involved fraud.
Section 3(a)(4) of the Exchange Act defines a “broker” as “any person engaged in the business of effecting transactions in securities for the account of others.” Section 15(a)(1) of the Exchange Act, in turn, makes it unlawful for any broker to use the mails or any other means of interstate commerce to “effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security” unless that broker is registered with the SEC.
However, the Exchange Act generally does not apply to transactions outside the U.S. In particular, Section 30(b) of the Exchange Act specifically states that “The provisions of this chapter or of any rule or regulation thereunder shall not apply to any person insofar as he transacts a business in securities without the jurisdiction of the United States, unless he transacts such business in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate to prevent the evasion of this chapter.” Although this provision seems very broad, case law has narrowed the exemption such that the U.S. would still have jurisdiction, and the broker-dealer registration requirements in the Exchange Act would still apply, where (i) transactions occur in a U.S. securities market (such as Nasdaq or the NYSE); (ii) offers and sales were made abroad to U.S. persons (such as U.S. armed forces stationed abroad); or (iii) if the U.S. was used as a base for securities fraud perpetrated on foreigners.
Regulation S itself is a jurisdictional exemption. Rule 901 of Regulation S provides: “[F]or the purposes only of section 5 of the Act (15 U.S.C. §77e), the terms offer, offer to sell, sell, sale, and offer to buy shall be deemed to include offers and sales that occur within the United States and shall be deemed not to include offers and sales that occur outside the United States.” Regulation S then continues to create a framework defining when an offer or sale is within the U.S. and preserves jurisdiction to protect foreign investors from offering fraud by U.S. persons.
Although not directly on point, SEC Rule 15a-6 provides a conditional exemption from the broker-dealer registration requirements for foreign broker-dealers that engage in certain specified activities involving U.S. investors. Rule 15a-6(b)(3) defines foreign broker-dealer to include “any non‑U.S. resident person (including any U.S. person engaged in business as a broker or dealer entirely outside the United States, except as otherwise permitted by this rule) that is not an office or branch of, or a natural person associated with, a registered broker or dealer, whose securities activities, if conducted in the United States, would be described by the definition of ‘broker’ or ‘dealer’ in sections 3(a)(4) or 3(a)(5) of the [Exchange] Act.” Notably, Rule 15a-6 does not include a requirement that a broker be licensed or registered in its foreign jurisdiction. Rather, the Rule only requires that the foreign broker be operating legally in its country of jurisdiction.
Rule 15a-6 allows certain transactions by foreign brokers with U.S. investors without registration. Regulation S, on the other hand, would only involve transactions with non-U.S. investors. Further in the Rule 15a-6 release, the SEC indicated that the exception in Rule 15a-6(a)(1) for unsolicited trades was designed to reflect the view that “U.S. persons seeking out unregistered foreign broker-dealers outside the U.S. cannot expect the protection of U.S. broker-dealer standards.” Again, in a Regulation S transaction, both the foreign finder and the investor would be outside the U.S.
Both Regulation S and Rule 15a-6 are based on the investors or brokers being outside the U.S. In determining whether such person is outside the U.S., the SEC will consider factors like whether the person physically visits the U.S., where a business has offices, where it has employees, where business is conducted and where bank accounts are located. Regulation S is very strict in its requirements that investors, and therefore finders, not have a connection to the U.S. at the time of an offer or sale of securities.
The bottom line is that I am comfortable that a foreign finder, operating exclusively outside the U.S. and exclusively soliciting non-U.S. investors, would be able to collect a transaction-based success fee without running afoul of the U.S. broker-dealer registration requirements.
Laura Anthony, Esq.
Anthony L.G., PLLC
A Corporate Law Firm
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC 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, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with 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; 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 American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA 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 small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
Ms. Anthony is a member of various professional organizations including the Crowdfunding Professional Association (CfPA), Palm Beach County Bar Association, the Florida Bar Association, the American Bar Association and the ABA committees on Federal Securities Regulations and Private Equity and Venture Capital. She is a supporter of several community charities including siting on the board of directors of the American Red Cross for Palm Beach and Martin Counties, and providing financial support to the Susan Komen Foundation, Opportunity, Inc., New Hope Charities, the Society of the Four Arts, the Norton Museum of Art, Palm Beach County Zoo Society, the Kravis Center for the Performing Arts and several others. She is also a financial and hands-on supporter of Palm Beach Day Academy, one of Palm Beach’s oldest and most respected educational institutions. She currently resides in Palm Beach with her husband and daughter.
Ms. Anthony is an honors graduate from Florida State University College of Law and has been practicing law since 1993.
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