In the "finder" friendly opinion, a Florida court rejected the SEC's single-factor, transaction-based compensation test for determining "broker" status under the Exchange Act and held that an array of non-exclusive factors should be evaluated when determining whether a finder engages in broker activity thus requiring the finder to register as a "broker" under the Exchange Act.
The case involved an individual, who was not a registered broker, that had an understanding with the issuer that he would be directly compensated if he introduced potential investors who invested in the issuer. In connection with successful introductions of his family, close friends, business acquaintances, and a broker to the issuer by the individual, the issuer paid the individual approximately $190,000 and gave him stock in the issuer. In connection with these introductions, the individual told the potential investors that the issuer was a good company and a good investment and he told the potential investors to read the issuer's press releases and to visit the issuer's website. The SEC sued the individual alleging that his actions resulted in a violation of the Exchange Act's broker registration requirement because the individual was a person engaged in the business of effecting transactions in securities for the account of others and was required to be registered as a broker.
The court noted that "the distinction between a finder and a broker, however, remains largely unexplored, and both the case and the SEC's informal, 'no-action' letter advice is highly dependent upon the facts of a particular arrangement" and that "an array of factors determine the presence of broker activity [and in] the absence of a statutory definition enunciating otherwise, the test for broker activity must remain cogent, multifaceted, and controlled by the Exchange Act." The court stated that "[b]ecause the Exchange Act defines neither 'effecting transactions' nor 'engaging in the business,' an array of factors determines whether a person qualifies as a broker under Section 15(a) [and] [t]he most frequently cited factors … consist of whether a person (1) works as an employee of the issuer, (2) receives a commission rather than a salary, (3) sells or earlier sold the securities to another issuer, (4) participates in negotiations between the issuer and an investor, (5) provides either advice or a valuation as to the merit of an investment, and (6) actively (rather than passively) finds investors." Moreover, the court stated that "the factors articulated … are not designed to be exclusive and some factors (i.e., those factors typically associated with broker activity) appear more indicative of broker conduct than others." Thus, the court held that the individual's actions did not rise to that of a "broker" requiring him to register under the Exchange Act and, in particular, the court noted that the individual's "conduct consisted of nothing more than bringing together the parties to a transaction." The court also noted that no evidence was presented to show that the individual either participated in the negotiation, discussed the detail of the transaction, analyzed the financial status of the issuer, or promoted an investment in the issuer.
The court's decision is likely not the final word on the factors used to determine whether a finder's actions rise to the level of a broker, consequently requiring registration under the Exchange Act.
S.E.C v. Kramer, 2011 WL 1230808 (M.D. Fla. 2011)