When Do Company Sales, Capital Raises Require a Broker-Dealer? Severe Penalties Can Ambush the Unwary
BY TOM GOLDBLATT, CTP-D, RAVINIA CAPITAL LLC
Every day thousands of transactional professionals, including consultants, attorneys,
commercial bankers, wealth managers,
and accountants, are involved in
advising on and referring out sales of
companies and capital raises or are
effectuating the transactions themselves.
For many of these transactions, it is
imperative that a registered broker-dealer handle the transaction, while for
others, a broker-dealer is not needed.
The consequences of violating
securities laws, even unintentionally,
can be severe, including rescission
of deals, penalties, and even criminal
liability. The liability could extend
not just to the broker, but also to the
company that hired the broker.
capital financings, including private
placements; and ( 5) finding buyers and
sellers of businesses in which securities
are involved. (Div. of Trading & Mkts.,
U.S. Secs. & Exch. Comm’n, Guide to
Broker-Dealer Registration (Apr. 2008)).
Despite the different types of
professionals impacted, the SEC appears
to apply the same standard to all of
them when determining whether they
should register as a broker-dealer.
Unfortunately, understanding which
situations require a broker-dealer and
which do not can be difficult. This article
provides an overview of when sales of
companies and capital raises require
the involvement of a broker-dealer.
Becoming a registered representative
of a broker-dealer involves passing
securities exams, including the Series 79.
Additionally, a licensee must pay certain
fees, have his or her correspondence
reviewed, and pay fees to a broker-dealer firm. Finally, fees for transactions
involving securities must be paid to the
broker-dealer firm, which then remits
the representative his or her share.
Most people understand that selling
the stock of a company, raising venture
capital, and raising mezzanine debt with
warrants all involve selling securities
and require involvement by a broker-dealer. However, many professionals
have little more than a vague
understanding of what other situations
require the use of a broker-dealer.
The U.S. Securities and Exchange
Commission’s (SEC’s) “Guide to Broker-
Dealer Registration” identifies the
following activities as possibly requiring
registration as a broker: ( 1) finding
investors or customers for, making
referrals to, or splitting commissions
with registered broker-dealers; ( 2) finding
investment banking clients for registered
broker-dealers; ( 3) finding investors for
“issuers,” even if they act in a “consultant”
capacity; ( 4) finding investors for venture
The SEC was established by the
Securities and Exchange Act of 1934 to
protect investors in securities from fraud
and manipulation. The act mandated
regulation of all investment bankers
who promoted stocks and bonds and
other investment instruments and
subjected them to certain standards.
Most regulation of the industry is
handled by the Financial Industry
Regulatory Authority (FINRA), a
private institution that oversees
the activities of broker-dealers.
Some sales and capital raises do not
require a broker-dealer. Transactions
that do not involve the sale of securities,
such as asset sales or simple working