The definition of "broker" is a fundamental concept in the regulation of the securities markets under the Securities Exchange Act of 1934 (the "Exchange Act") and yet the parameters of this definition remain uncertain, at least as it relates to the distinction between "broker" and "finder." Earlier this year, the District Court for the Middle District of Florida, Tampa Division, ruled against the SEC in SEC v. Kramer. The SEC alleged that Kramer acted as an unregistered broker in violation of Section 15(a)(1) of the Exchange Act. Despite the fact that Kramer received nearly $200,000 in transaction-related compensation as part of an arrangement to introduce potential investors to a company, the court ruled that the SEC failed to meet its burden of showing that the defendant "engaged in the business of effecting transactions in securities in the accounts of others" in order to show that he was a "broker" under Section 3(a)(4) of the Exchange Act. The Kramer court held that a multi-factor analysis should be used in determining whether a finder engaged in broker activity with respect to securities transactions. In addition to transaction-based compensation, these factors include negotiation of the terms of the transaction, participation in the transaction at key points and providing advice or valuation as to the merit of the investment. In doing so, the Court rejected the SEC's singular reliance on transaction-based compensation in finding broker activity, and perhaps opened the door for a clearer distinction to be drawn between "brokers" and "finders."
This case centered around Kramer's alleged efforts to solicit investors in the stock of Skyway Communications. Kramer's business partner, Baker, had an established relationship with Skyway: he had previously facilitated a merger on behalf of Skyway and he also had an agreement with Skyway whereby he was compensated for promoting the company to investors. Kramer also began participating in the promotional activities of Skyway and soon facilitated a meeting between Skyway and another broker. That broker then sold $14 million of Skyway's shares to investors, for which Kramer received significant compensation. The Court held that this activity merely consisted of bringing two sides together and that Kramer's receipt of transaction-based compensation, without more, does not make him a "broker." Kramer also received a 20% commission in Skyway shares when a small group of investors, consisting of family, friends, and acquaintances, invested in the company after Kramer told them about Skyway, directed them to the company's website, and suggested that Skyway was a good investment. In finding the absence of broker activity in connection with these transactions, the court said that the nature of Kramer's relationship with these investors was an important factor.
Please note that the court's decision was based on the specific facts and circumstances of this case. We would continue to advise persons acting as "finders" to consult with legal counsel before accepting transaction-based compensation prior to registering as a broker. In addition, the court's apparent finder-friendly decision may have an expiration date as the SEC is seeking a path to appeal. If the SEC is successful, the Eleventh Circuit Court of Appeals will likely have an opportunity to express its views on the gray area between "finder" and "broker." We will keep you up to date on any further developments.