In our last edition, we discussed a recent SEC enforcement action against a private equity fund advisory firm and its owner, who agreed to pay more than $3 million to settle charges that included engaging in brokerage activities and charging fees without registering as a broker-dealer. In that case, the advisory firm allegedly performed services related to the acquisition and disposition of portfolio companies for a pair of private equity funds it advised, and disclosed that it would provide brokerage services for a fee. The firm, however, was not registered as a broker-dealer.
While the particular facts of that case caused it to stand out, the way the SEC’s press release was written, with its emphasis on the broker-dealer registration issue (the case also involved a number of alleged violations of the Investment Advisers Act), seemed to indicate that the SEC may be increasing its focus on persons engaging in broker-dealer activities (including the provision of investment banking services) without being registered as broker-dealers.
Earlier this week, the SEC published an order with respect to a case with entirely different facts, but which included the same underlying issue — acting as a broker-dealer without being registered as such. In this case, an individual and two companies he controlled offered to help small businesses raise money from investors. They offered to structure and prepare securities offerings, shepherd them through the SEC’s review process, and then market the securities to the investing public. Neither company was registered as a broker-dealer and the individual was not associated with one. The individual and the two companies also apparently made a number of material misrepresentations about the nature and success of their business activities and failed to disclose sanctions imposed against them by state securities regulators for acting as an unregistered broker-dealer and defrauding customers.
As with the case we discussed in the last edition, there are some bad facts here, including the allegations of fraud, that would make this a case of interest for the SEC in any event. But it is clear that the conduct of the accused parties — which included holding themselves out, without registration, as providing services that included helping customers raise capital, listing securities for sale on certain “markets” they controlled, structuring offerings, preparing offering documents and marketing offered securities to potential investors — was important to the SEC in bringing this action. When viewed alongside the matter discussed in our last edition, this should serve as a warning that the SEC will bring actions against people who, for compensation, help companies find investors, and provide other services normally provided by registered broker-dealers, when the facts lead the SEC to conclude that the person is acting as a broker-dealer without being registered.
Remember, according the Securities Exchange Act, the term “broker” applies to “any person engaged in the business of effecting transactions in securities for the account of others,” and it doesn’t take much to be viewed as “engaging in the business.” Finding investors and being paid for those referrals can be enough to start the inquiry. Thus, as we suggested last time, those whose business activities include any indicia of broker-dealer activity should take a good look at what they are doing and perform a fresh analysis of whether some of those activities require registration as a broker-dealer. As always, we are prepared to assist with that analysis.