Commissioner Uyeda’s Statement On Dealer Litigation
On August 19, 2024, SEC Commissioner Mark T. Uyeda published a statement regarding one of the numerous defendants in SEC initiated enforcement proceedings claiming unlicensed dealer activity. The statement resonates with the sentiments of most of my colleagues, peers and clients.
Background
In November 2017 the SEC shocked the industry when it filed an action against Microcap Equity Group, LLC and its principal alleging that its investing activity required licensing as a dealer under Section 15(a) of the Exchange Act. Since that time, the SEC has filed numerous additional cases with the sole allegation being that the investor acted as an unregistered dealer. In each case, the investor entity purchased convertible promissory notes from micro-cap OTC Markets issuers (or other existing note holders), which, after the applicable Rule 144 holding period, were converted into shares of common stock and sold on the open market. As the securities were generally low priced, the conversions resulted in large quantities of additional
What Is Regulation M?
Regulation M, which was adopted in 1996, is designed to prevent market manipulation by participants in a securities offering by regulating certain activities. In general, Regulation M restricts distribution participants (underwriters, placement agents and their affiliates), issuers, selling security holders and their affiliates, from bidding for, purchasing, or attempting to induce other to bid for or purchase, certain securities during an applicable restricted period. Regulation M also prohibits any person that has sold short a security that is the subject of a registered offering from purchasing securities in the offering from an underwriter, or broker or dealer participating in the offering if the short sale took place during a specified period prior to the pricing of the registered offering.
Although a large part of Regulation M relates to underwriter and broker dealer conduct and due diligence obligations, it is helpful for issuers and selling security holders to understand the rules as pertains to them. Regulation M consists of six
SEC Report On Meme Stocks
On October 18, 2021, the SEC released a report on the meme stock craze that caused the securities of companies like GameStop Corp. to soar to unprecedented high trading prices and volume. Commissioners Hester Peirce and Elad Roisman criticized the report as being used as an excuse to add or consider adding additional regulations in the areas of conflicts of interest, payment for order flow, off-exchange trading, and wholesale market making when, however, no causal connection between the meme stock trading and these other factors has been established. I found the report interesting for the background and discussion on the U.S. trading markets.
Market Structure
From the perspective of individual investors, the lifecycle of a stock trade starts with an investor placing an order through an account they establish with a broker-dealer. The broker-dealer then routes the order for execution to a trading center, such as a national securities exchange, an alternative trading system (“ATS”), or an off-exchange market
Digital Asset Securities – Progress For Broker Dealers
In December 2020, the SEC issued a statement and request for comment regarding the custody of digital asset securities by broker-dealers. The Statement and request for comment sets forth suggestions for complying with the Customer Protection Rule and lists certain requirements that a broker-dealer could comply with to ensure that it would not be subject to an enforcement proceeding for violation of the Customer Protection Rule.
Two months later, in February 2021, the SEC Division of Examinations issued a risk alert focused on digital asset securities. These statements were the first hitting head on the topic of digital asset custody since an August 2019 joint statement by the SEC and FINRA on the custody of digital assets (see HERE) and October 2019 joint statement by the SEC, FinCEN and the CFTC (see HERE).
The SEC and FINRA have been discussing issues of custody related to tokens and digital assets for years. For example, issues surrounding the custody
Finders – Part 2
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.
Regulation S
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
OTC Markets Issues Comment Letters On FINRA Rules 6432 And 5250; The 15c2-11 Rules
January 8, 2018, OTC Markets Group, Inc. (“OTC Markets”) submitted a comment letter to FINRA related to FINRA Rule 6432. Rule 6432 requires that a market maker or broker-dealer have the information specified in Securities Exchange Act Rule 15c2-11 before making a quotation in a security on the over-the-counter market. Although I summarize the salient points of the OTC Markets comment letter, I encourage those interested to read the entire letter, which contains an in-depth analysis and comprehensive arguments to support its position. On February 8, 2018, OTC Markets submitted a second comment letter to FINRA, this one related to FINRA Rule 5250. Rule 5250 prohibits companies from compensating market makers in connection with the preparation and filing of a Form 211 application.
Rule 6432 – Compliance with the Information Requirements of SEA Rule 15c2-11
Subject to certain exceptions, including the “piggyback exception” discussed below, Rule 6432 requires that all broker-dealers have and maintain certain information on a
The Payment Of Finders’ Fees- An Ongoing Discussion
Introduction
As a recurring topic, I discuss exemptions to the broker-dealer registration requirements for entities and individuals that assist companies in fundraising and related services. I have previously discussed the no-action-letter-based exemption for M&A brokers, the exemptions for websites restricted to accredited investors and for crowdfunding portals as part of the JOBS Act and the statutory exemption from the broker-dealer registration requirements found in Securities Exchange Act Rule 3a4-1, including for officers, directors and key employees of an issuer. I have also previously published a blog on the American Bar Association’s recommendations for the codification of an exemption from the broker-dealer registration requirements for private placement finders. I’ve included links to each of these prior articles in the conclusion to this blog.
A related topic with a parallel analysis is the use of finders for investors and investor groups, an activity which has become prevalent in today’s marketplace. In that case the investor group utilizes the services
FINRA Proposes New Category Of Broker-Dealer For “Capital Acquisition Brokers”
In December, 2015, FINRA proposed rules for a whole new category of broker-dealer, called “Capital Acquisition Brokers” (“CABs”), which limit their business to corporate financing transactions. In February 2014 FINRA sought comment on the proposal, which at the time referred to a CAB as a limited corporate financing broker (LCFB). Following many comments that the LCFB rules did not have a significant impact on the regulatory burden for full member firms, the new rules modify the original LCFB proposal in more than just name. The new rules will take effect upon approval by the SEC and are currently open to public comments.
A CAB will generally be a broker-dealer that engages in M&A transactions, raising funds through private placements and evaluating strategic alternatives and that collects transaction based compensation for such activities. A CAB will not handle customer funds or securities, manage customer accounts or engage in market making or proprietary trading.
As with all FINRA rules, the proposed
Finders- The Facts Related To Broker-Dealer Registration Requirements
Introduction
As a recurring topic, I discuss exemptions to the broker-dealer registration requirements for entities and individuals that assist companies in fundraising and related services. I have previously discussed the no-action-letter-based exemption for M&A brokers, the exemptions for websites restricted to accredited investors and for crowdfunding portals as part of the JOBS Act and the statutory exemption from the broker-dealer registration requirements found in Securities Exchange Act Rule 3a4-1, including for officers, directors and key employees of an issuer. I have also previously published a blog on the American Bar Association’s recommendations for the codification of an exemption from the broker-dealer registration requirements for private placement finders. I’ve included links to each of these prior articles in the conclusion to this blog.
A related topic with a parallel analysis is the use of finders for investors and investor groups, an activity which has become prevalent in today’s marketplace. In that case the investor group utilizes the services of a finder
SEC Proposes Broadening Of Broker-Dealer Registration Rules To Include Proprietary And High-Frequency Traders
On March 25, 2015, the SEC proposed rule amendments to require high-frequency and off-exchange traders to become members of FINRA. The amendments would increase regulatory oversight over these traders.
Over the years many active cross-market proprietary trading firms have emerged, many of which engage in high-frequency trading. These firms generally rely on the broad proprietary trading exemption in rule 15b9-1 to forgo membership with, and therefore regulatory oversight by, FINRA. The rule change is specifically designed to require these high-frequency traders to become members of FINRA and submit to its review and oversight.
The proposed rule change amends Rule 15b9-1 of the Securities Exchange Act of 1934, as amended (“Exchange Act”) to narrow a current exemption from FINRA membership if the broker is a member of a national securities exchange, carries no customer accounts and has annual gross income of no more than $1,000 derived from sources other than the exchange to which they are a member. Currently, income
