The Securities and Exchange Commission (SEC) staff appears to be focusing on the broker-dealer registration issue in the context of private securities marketing activities. Recent SEC enforcement actions demonstrate there are serious consequences for acting as an unregistered broker, even where there are no allegations of fraud. This regulatory focus will likely continue, and could increase, with the use of general solicitation and general advertising in Rule 506 private offerings permitted by the Jumpstart Our Business Startups (JOBS) Act.

Common Scenario with Risks

The broker-dealer registration issue commonly arises when a company or private investment fund raises capital from investors in a private (unregistered) securities offering using its own employees or third party “finders” to locate investors. When these individuals solicit investors on a regular basis or are specifically compensated for their efforts, they may be required to register as a broker or to be associated with a registered broker-dealer firm.

A company or individual acting as an unregistered broker-dealer is in violation of applicable registration requirements and faces possible government enforcement action, monetary penalties and investor lawsuits seeking rescission of the investment and recovery of the purchase price paid. Registering as a broker-dealer is a significant undertaking and will subject the firm to extensive regulation by the SEC, Financial Industry Regulatory Authority (FINRA) and/or state securities regulators. It is normally not a practical alternative for companies engaged in limited or infrequent capital raising activities.

Who is a Broker-Dealer?

The test for broker registration is broad and depends on the particular facts and circumstances. The principal factors the SEC considers include whether the person (1) actively solicited investors, (2) advised investors as to the merits of an investment, (3) regularly participated in securities transactions and (4) received commissions or transaction-based remuneration.

Issuer Exemption. Entities issuing securities (issuers) generally are not “brokers” because they sell securities for their own account and not for the account of others. Issuers are also normally not “dealers” because they do not sell securities for their own account as a part of a regular business. According to the SEC, this so-called “issuer’s exemption” does not apply to the personnel of a company who routinely engage in the business of effecting securities transactions for the company, such as general partners, employees and other related persons seeking investors in the company.

The SEC has adopted Rule 3a4-1, a safe harbor rule, to provide a broker registration exemption for people associated with an issuer who participate in the sale of the issuer’s securities, including officers and employees of the issuer, a corporate general partner of a limited partnership issuer, or a company affiliated with the issuer. Under the safe harbor, an associated person will not be deemed a broker if, among other things, the person:

  • Is not compensated by payment of commissions or other remuneration based on securities transactions;
  •  Is not associated with a broker-dealer; and 
  • Limits sales activities either (1) to one offering per 12 month period and performs other substantial duties, (2) to soliciting only certain financial institutions or (3) to passive or clerical duties not involving solicitation of investors. 

Finders Exemption. It is generally thought that persons who do nothing more than introduce prospective investors to the issuer, do not participate in negotiating the transaction, and who receive compensation not dependent on or related to the purchase of a security are “finders,” not “brokers,” and are not required to be registered. While a few no-action letters support this position, the SEC has been reluctant to create a “finder’s exemption.”

The SEC has cautioned that persons who find investors for issuers, even in a “consultant” capacity, may need to register as a broker depending on a number of factors, including whether (1) the finder participates in the solicitation, negotiation or execution of the transaction, (2) compensation is related to the outcome or size of the transaction, (3) the finder is otherwise engaged in the business of effecting securities transactions and (4) the finder handles securities or funds of others. A “yes” answer to any of these factors indicates that registration may be required.

State Exemptions. Each state has laws defining broker-dealer, agent and related registration requirements. Under the Uniform Securities Act, adopted in large measure by many states, an issuer selling its own securities is exempt from broker-dealer registration. An employee or other individual who represents an issuer is exempt if no commission or other remuneration is paid for soliciting investors. Ohio specifically exempts a finder if his or her compensation is not based on the sale of securities by the issuer to the investor.

Recent SEC Activity

Enforcement Actions. SEC enforcement actions alleging violations of the broker-dealer registration provisions of the Exchange Act overwhelmingly involve fraudulent, deceptive or illegal conduct in addition to the failure to register as a broker-dealer. However, two recent enforcement actions show that the SEC is pursuing unregistered broker-dealer claims in situations that do not involve allegations of fraud.

In March 2013, the Commission found that Ranieri Partners LLC, a private equity firm, violated the broker-dealer registration requirements by paying transaction-based compensation to a consultant (1% of capital commitments obtained), who was not registered as a broker or associated with a registered broker-dealer, for soliciting potential investors in mortgage opportunity funds sponsored by the firm. The consultant’s activities went beyond accepted practices for finders, although there were no allegations or findings of fraud, deception or other illegal conduct by the firm. Likewise, on June 5, 2013, the SEC filed a civil injunctive action charging Banc de Binary Ltd., a Cyprus-based company, with illegally selling binary option contracts to U.S. investors. The SEC alleged the binary options were sold in violation of securities registration requirements and that, through its online trading platform, Banc de Binary was effecting securities transactions for its customers’ accounts without being registered as a broker-dealer. Again, there were no allegations of fraud, deception or other illegal conduct by the firm.

Speech. On April 15, 2013, David W. Blass, Chief Counsel of the SEC’s Division of Trading and Markets, in a speech to an American Bar Association subcommittee, discussed the broker-dealer registration issue in the context of sales activities by private fund managers and sponsors. His remarks followed SEC staff observations in connection with newly registered private fund advisers under the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Blass stated that private fund advisers might want to ask themselves the following questions to help determine whether their capital raising activities require broker-dealer registration:

  • How does the adviser solicit and retain investors? A dedicated sales force of employees working within a marketing department (i.e., a department dedicated to selling interests in private funds rather than one that informs clients about investment advisory services) may strongly indicate the adviser is “in the business” of effecting transactions in the private fund regardless of how the personnel are compensated. 
  • Do employees who solicit investors have other responsibilities? If their primary function is soliciting investors for the private funds, the employees may be acting as brokers. 
  • How are personnel who solicit investors for a private fund compensated? Individuals who receive bonuses or other types of compensation linked to successful investments risk being viewed as brokers. Receipt of transaction-based compensation is a hallmark of being a broker. 
  • Does the private fund or the adviser charge a transaction fee linked to investment in the fund? If so, the adviser may be viewed as acting as a broker in connection with sales to fund investors. 

Blass noted that the Rule 3a4-1 safe harbor is generally not used by private fund advisers because it is difficult for them to meet one of the three conditions of the rule limiting employee solicitation activities. Blass floated the idea of an exemption written specifically for private fund advisers to accommodate their business practices, except for payment of transaction-based compensation.


The JOBS Act, among other things, directed the SEC to revise its rules to permit general solicitation and general advertising in offerings under Rule 506 of Regulation D, provided all purchasers in the offering are accredited investors. The JOBS Act also added a new exemption from broker-dealer registration for online platforms that are used to market securities in Rule 506 offerings (so-called “Regulation D portals”). This exemption is separate from the JOBS Act exemption for crowd funding portals.

The new online platform exemption permits a person, in a Rule 506 offering, to (1) maintain a platform or mechanism that permits the offer, sale, purchase, negotiation, general solicitations, general advertisements, or similar activities by issuers, whether online, in person, or through other means, (2) co-invest in the offering, or (3) provide ancillary services (due diligence services or standardized documents), if certain condition are met.

Online platforms relying on the exemption (1) may not receive transaction-based compensation (but may charge other types of fees), (2) may not have possession of customer funds or securities, and (3) may not receive separate compensation for investment advice to issuers or investors.

The exemption is a narrow one intended to assist “angel” investors to connect with startup companies by removing the uncertainty of broker-dealer registration faced by online investment intermediaries. The SEC staff has stated that persons associated with an issuer in a Rule 506 offering may rely on the exemption to maintain an online platform, but that employees or other persons who receive a salary or other compensation to promote the issuer’s securities cannot. While the exemption provides a safe harbor from broker registration for the specific conduct described, other activities in connection with the offer and sale of securities in a Rule 506 offering may still require broker registration as discussed above.


With the focus on the broker-dealer registration issue in relation to private securities marketing activities, companies and private funds using employees or other unregistered persons to solicit investor capital must be cautious in monitoring their activities for compliance with legal standards or face significant legal risk. This risk profile can be expected to increase as issuers’ securities marketing activities become more visible with the use of general solicitation and general advertising in Rule 506 offerings to accredited investors permitted by the JOBS Act.