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Birmingham Bar Association Bulletin - Fall 2013

Securities Law Kate Musso Unregistered Brokers: Pitfalls in Capital Raising The Securities and Exchange Commission (“SEC”) has launched a new enforcement focus on unregistered brokers. This should be of particular concern for “finders” and others who might have a “salesman’s stake” in a securities transaction. A broker is a person who effects transactions in securities for the account of others for compensation. Involvement of unregistered brokers can taint a deal, triggering rescission obligations in addition to exposing the individual to fines and penalties. Many do not recognize that lawyers may also expose themselves, unwittingly, to being deemed unregistered brokers. On March 11, 2013, the SEC announced charges against Ranieri Partners, a private equity firm, a senior officer of the firm, and a consultant, William M. Stephens. 1 Stephens was charged as an “unregistered broker” and ordered to disgorge approximately $2.4 million in compensation. 2 The SEC stated: Stephens engaged in the business of effecting transactions in securities in several ways despite not being registered as a broker or affiliated with a registered broker-dealer. Stephens sent private placement memoranda, subscription documents, and due diligence materials to potential investors, and urged at least one investor to consider adjusting portfolio allocations to accommodate an investment with Ranieri Partners. Stephens provided potential investors with his analysis of the strategy and performance track record for Ranieri Partners’ funds, and also provided confidential information identifying other investors and other capital commitments. 3 Some observers reacted with surprise as Stephens’ conduct is not uncommon to persons acting as “finders.” A “finder” is an intermediary who does nothing more than bring merger or acquisition-minded people or entities together and does not participate in negotiations or settlements, according to a long line of SEC No-Action Letters. The role of finders was expanded over the years to include analysis of an issuer, the structuring of securities transactions and the receipt of transaction-based compensation. From 1985 to 2000, parties could participate in securities transactions and receive compensation based on the success of a transaction in reliance on the Dominion Resources No-Action Letter.4 On March 7, 2000, however, the staff of the Division of Market Regulation of the SEC revoked the Dominion Resources No-Action Letter, noting: Since issuing the August 22, 1985 letter to Dominion Resources, the staff has frequently considered the question of when a person is a broker that must register as a broker-dealer under Section 15 of the Exchange Act, and when the person is merely a “finder” that is not subject to registration. In the intervening years, technological advances, including the advent of the Internet, as well as other developments in the securities markets, have allowed more and different types of persons to become involved in the provision of securities-related services.5 Notwithstanding the revocation of the Dominion Resources No-Action Letter in 2000, the activities of unregistered brokers continued to abound in the industry. A special Task Force on Private Placement Broker-Dealers of the American Bar Association issued a report in 2005 which noted the continuing practice with concern.6 The report noted At their worst, unregistered financial intermediaries are the bane of the financing business. They appear at the beginning of an offering (but sometimes aren’t discovered until later in the offering) and may have engaged in general advertising or solicitation before the attorneys arrive. They can be making offerings that violate the antifraud provisions of the federal and state securities laws. They can be the purveyors of that most worthless product in the securities industry – the “clean public shell.” They can bring to the transaction the market manipulators and profiteers whose only interest is the fast buck regardless of the consequences to the company or its investors. They can cause offers or sales to occur without regard to compliance with the very requirements of the securities offering exemptions they purport to rely on when advising an issuer.7 On April 5, 2013, David Blass, Chief Counsel, Division of Trading and Markets of the SEC, delivered a speech which noted that private fund advisers, in particular, need to consider whether their activities necessitate registration as a broker-dealer.8 34 Birmingham Bar Association


Birmingham Bar Association Bulletin - Fall 2013
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