Broker-Dealer Registration

On April 27, 2016, the House of Representatives passed the Helping Angels Lead Our Startups Act (H.R. 4498) (the “HALOS Act”), which was first introduced on April 16, 2015.  The HALOS Act directs the SEC to amend Regulation D under the Securities Act to make the prohibition against general solicitation or general advertising inapplicable to events with specified sponsors (including angel investor groups not connected to broker-dealers or investment advisers) where:

  • presentations or communications are made by or on behalf of an issuer;
  • the advertising does not refer to any specific offering of securities by the issuer;
  • the sponsor does not engage in certain activities (such as offering investment recommendations or advice to attendees); and
  • no specific information regarding a securities offering is communicated (other than that the issuer is in the process of offering or planning to offer securities, including the type and amount of securities being offered).

In addition, the HALOS Act (1) limits the types of fees ‘‘demo day’’ sponsors can collect (cannot receive any compensation for making introductions between investors attending the event and issuers, or for investment negotiations between such parties), (2) limits attendance at “demo days” to only individuals with financial sophistication (members of an angel investor group or accredited investors), and (3) requires that an issuer not be in bankruptcy or receivership, an investment company, or a blank check, blind pool or shell company.  H.R. 4498 is available at:

The HALOS Act would incorporate into regulation issues as to which the SEC Staff already has provided guidance either in the form of no-action letter guidance (on demo days, for example) or in Compliance and Disclosure Interpretations.

On April 21, 2016, the Fair Access to Investment Research Act of 2016 (H.R. 5019) (the “Fair Access to Investment Research Act”) was introduced in the House of Representative.  The Fair Access to Investment Research Act directs the SEC to amend Rule 139 under the Securities Act to provide that a covered investment fund research report that is published or distributed by a broker-dealer will be deemed, for purposes of Sections 2(a)(10) and 5(c) of the Securities Act, not to constitute an offer for sale or an offer to sell a security that is the subject of an offering pursuant to a registration statement that is effective (even if the broker-dealer is participating or will participate in the registered offering of the covered investment fund’s securities).  H.R. 5019 is available at:

The Financial Crimes Enforcement Network (FinCEN) proposed to amend the Bank Secrecy Act’s (BSA) definition of “Broker or Dealer in Securities” to include funding portals  in order to ensure that funding portals implement policies and procedures reasonably designed to achieve compliance with the BSA requirements, including the filing of suspicious activity reports, currently applicable to brokers or dealers in securities.

The BSA regulatory definitions of broker or dealer in securities do not include funding portals. The current BSA regulations define broker-dealers in securities as being those persons “registered, or required to be registered, as a broker or dealer with the SEC under the 1934 Act.”  The JOBS Act also exempted certain funding portals from the 1934 Act’s registration requirements, thus excluding them from the BSA’s definition of brokers or dealers in securities. After consulting the SEC, FinCEN is proposing to amend the relevant BSA definitions to include funding portals, and therefore retain access to the important reports and records that these businesses may provide to combat money laundering and terrorist finance.

The proposed amendments are available here:

On January 31, 2014, the SEC issued a ground-breaking no-action letter, taking the position that a financial intermediary that limits its business activity to advising privately held companies in M&A transactions need not register as a broker-dealer. The no-action letter, as revised on February 4, 2014, may be found here: This no-action letter departs from the SEC’s long-standing position that treated M&A brokers in the same manner as more traditional broker-dealers. It also opens the door for brokers who only represent private companies in M&A transactions to withdraw their broker-dealer registration with the SEC. Before doing so, however, they should consider both the limitations in the no-action letter and the implications under state law should they cease to be an SEC-registered broker-dealer.  Read our alert, available here:

David Blass, Chief Counsel of the SEC’s Division of Trading and Markets recently addressed the ABA’s membership at its annual meeting, and commented on the need to consider closely whether certain private funds, finders and other intermediaries should register as broker-dealers.  Following the SEC Staff’s recent no-action letters to AngelList and FundersClub, Blass’s comments are particularly timely.  Blass noted that the Staff has been focused on granting relief from registration requirements (where appropriate), and “working collaboratively with FINRA on a more customized approach for regulation of market participants who perform only limited broker functions.”  In this context, Blass mentioned the Staff’s work with FINRA to consider the appropriate level of regulation for funding portals given the limited scope of their activities.  He noted that the Staff was considering whether there were “opportunities to extend the approach to other types of brokers whose activities are limited.”

Blass also cautioned that private funds should consider closely the scope of their activities and whether these activities would cause them to be registered as broker-dealers.  He noted a number of questions that an adviser ought to consider in connection with determining whether its activities are the type of activities requiring registration.  His remarks can be found at:  In connection with any collective investment scheme for angel investing or venture capital or private equity investing for start-ups and emerging companies, fund sponsors should consider their activities and determine whether specific exemptions from broker-dealer registration are available.

The Division of Trading & Markets also issued no-action letter guidance to AngelList in which the Staff indicated that it would not recommend enforcement action for failure to register as a broker-dealer if AngelList and its affiliates were to establish an internet-based platform to facilitate angel investing by accredited investors.  An affiliate of AngelList that intends to register as an investment adviser will provide certain advisory services to investment vehicles established for the purpose of investing in companies identified by AngelList.  The no-action letter guidance is premised on the SEC’s longstanding views of the factors that are indicative of broker-dealer activity (namely, AngelList will not receive transaction-based compensation), and is consistent with the matchmaking guidance contained in Title II of the JOBS Act.  The letter can be downloaded here:

It is important to note that the letter does not address any issues related to “general solicitation” or the means by which investors are identified or contacted, nor does the letter address “crowdfunding” issues.

On March 26, 2013, the SEC’s Division of Trading and Markets provided no-action relief to FundersClub Inc. and FundersClub Management LLC, indicating that the Division would not recommend enforcement action under Section 15(a)(1) of the Exchange Act if FundersClub and FundersClub Management LLC operated a platform through which its members could participate in Rule 506 offerings.  FundersClub identifies start-up companies in which its affiliated fund will invest, and then posts information about the start-up companies on its website so that the information is only available to FundersClub members, who are all accredited investors. The FundersClub members may submit non-binding indications of interest in an investment fund, which is relying on Rule 506 of Regulation D to conduct the offering. When a target level of capital is reached, the indication of interest process is closed and FundersClub reconfirms investors’ interest and accredited investor status, and negotiates the final terms of the investment fund’s investment in the start-up company.  Members may withdraw their indications of interest at any time.  In this process, FundersClub and FundersClub Management do not receive any compensation, however some administrative fees are charged.  FundersClub and FundersClub Management intend to be compensated through their role in organizing and managing the investment funds (at a rate of 20% or less of the profits of the investment fund, but never exceeding 30%).

The SEC Staff notes in the no-action letter that FundersClub’s and FundersClub Management’s current activities appear to comply with Section 201 of the JOBS Act, in part because they and each person associated with them receive no compensation (or the promise of future compensation) in connection with the purchase or sale of securities. However, once FundersClub, FundersClub Management or persons associated with them receive compensation or the promise of future compensation, as described in their incoming letter, they will no longer be able to rely on Section 201 of the JOBS Act.

This no-action letter is notable because it is the first relief from broker-dealer registration for a platform that provides investors with a means to invest in start-up companies following the enactment of the JOBS Act, but in many ways the relief follows a well-established path that developed over the years prior to enactment of the JOBS Act. The letter does not in any way address the JOBS Act’s crowdfunding exemption, or the ability to conduct a Rule 506 offering using general solicitation, neither of which avenues are currently available to issuers as we await SEC rulemaking.

The Staff of the SEC’s Division of Trading and Markets recently published a series of FAQs addressing certain broker-dealer matters arising in connection with Title II of the JOBS Act.  The FAQs are available here:

Title II of the JOBS Act formalizes the guidance that has been provided by the SEC in various no-action letters relating to the types of activities that may be conducted by matchmaking sites without requiring broker-dealer registration.  Section 201 notes that a matchmaking site will not be required to register as a broker-dealer solely by virtue of its private capital raising activities (which may include the use of general solicitation) provided that it complies with specified conditions.

The FAQs clarify that this provision does not require further rulemaking, but notes that a platform cannot permit an issuer to conduct a general solicitation in a Rule 506 offering until the SEC  promulgates its final rules.  The FAQs note that the exemption from broker-dealer registration in this section is applicable only when securities are offered and sold pursuant to Rule 506.  The FAQs also address compensation and note that “Congress conditioned the exemption on a person and its associated persons not receiving any “compensation” in connection with the purchase or sale of such security.” Congress did not limit the condition to transaction-based compensation. The staff interprets the term “compensation” broadly, to include any direct or indirect economic benefit to the person or any of its associated persons. At the same time, we recognize that Congress expressly permitted co-investment in the securities offered on the platform or mechanism. We do not believe that profits associated with these investments would be impermissible compensation for purposes of Securities Act Section 4(b).”  To this end, the FAQs note that a venture fund may operate a matchmaking site.

The FAQs also note that the availability of the exemption from broker-dealer registration should not be construed as suggesting that the entity is not otherwise a “broker” or a “dealer” and refers to its guidance on the types of activities typically associated with broker-dealer status.  The Staff also notes that the JOBS Act exemption does not address state registration requirements.

For several years, a task force within the Business Law Section of the American Bar Association has tried to get the attention of federal and state regulators to address an issue that comes up from time to time in private placements and even in an occasional public offering.  What do you do about a person who is instrumental in putting together a deal (or at least in introducing the parties) and who expects to receive some form of transaction-based compensation (i.e., “success fee”) but who is not registered as a broker or dealer with the Securities and Exchange Commission or any of the state authorities?  Although admittedly a gray area of the law, it gives securities lawyers pause when having to opine on the validity of an offering because the consequences for such a failure could possibly include a voiding of the transaction.

The task force’s latest attempt has been to draft a position paper, which has been submitted to the SEC’s Division of Trading and Markets and to certain state regulators and which was discussed at the Section’s recent annual meeting in Chicago.  The approach taken is to have the SEC adopt a rule exempting such persons from registration under the Securities Exchange Act of 1934 on the condition that they be registered with one or more states.  The proposal raises a number of questions which should be addressed in crafting such an exemptive rule (e.g., should there be a limit on the aggregate number or aggregate dollar value of transactions per year to qualify for the exemption?) and in providing for appropriate state regulation as a counterpart (e.g., will the states be encouraged to adopt a model state registration rule and, if so, how will they deal with typical licensing requirements such as net capital, fidelity bonds, qualification examinations, “bad actor” disqualifications and reports, among others?).  Although the task force makes a cogent case once again for taking up the finder issue, we do not foresee the regulators being able to deal with the matter any time soon.

F. Lee Liebolt, Jr. practices corporate and securities law in New York and can be reached at