Equity Crowdfunding and BrokerDealer Rules

Posted on October 8, 2015 by admin

BrokerDealer.com curators have received many inquiries from across the industry with regard to equity crowdfunding rules and regs. As spotlighted by industry experts at RaiseMoney.com, the portal launched by Wall Street expats, the SEC is getting ready to formally announce new rules for the multi-billion dollar crowd fund industry, and towards addressing the common questions, below is post produced by Scott Purcell, serial entrepreneur and founder and CEO of FundAmerica. Purcell keeps a highly informative blog, focusing on equity crowdfunding in the US, and we are sharing the latest post below…and remind our readers that the following is for informational purposes only. BrokerDealers or Investment Advisors who are engaged in crowdfunding initiatives should consult with their compliance officer and an attorney.

This is the single most common question I get asked. There’s a lot of misinformation about this, so let’s clear it up…

BrokerDealer.com hosts the world’s most comprehensive database of brokerdealers operating across 35 countries worldwide

Keep in mind that a “platform” is just a website. It’s NOT a business in and of itself (people often confuse a 506b/c or Reg A platform with a Title III “portal” as defined in the JOBS Act, and they are very differrent things). A platform is simply a tool for general solicitation. So you are not a platform, you are an issuer/investment adviser/listing service/broker-dealer who might have a website that lists offerings of securities, might use other websites that promote offerings of securities, might use social media to promote offerings of securities, might run newspaper ads to promote offerings of securities, might send emails to promote offerings of securities…you get the picture.

Platform Types:

There are four main types of businesses using platforms to market securities pursuant to 506-D (aka “Title II of the JOBS Act”) and Regulation A (“Title IV”):

Broker-dealers
Investment advisers
Ad/listing services
Direct Issuers

Which one are you? Well that depends upon your business model.

Broker-dealers can charge commissions based upon the amount and/or success of an offering. They can also make specific recommendations (not to be confused with “general solicitation”, which anyone can do in a 506(c) or Reg A offering whether registered or not). BD’s typically charge around 8%+ of an offering to cover costs associated with compliance, due diligence, sales commissions, etc. So if you want to charge, for example, an 8% commission on a $1M offering then you need to either be a FINRA member firm or a registered representative of one.

NOTE: only BD’s and registered representatives can receive commissions or success-based compensation. You CANNOT receive commissions as a rep and then hand those over to an unregistered person or company. This is a huge mistake we have heard many operators are making; getting someone in their firm registered so the BD can pay them, and then having them hand over those fees as income to the firm. Illegal. Games cannot be played with this (e.g. charging the rep a huge office rent) as regulators are wise to that and the results will not be pretty. So unless you intend to register every single person in your business, or to buy all or part of a broker-dealer, there is no way for you to receive any income tied to the amount or success of a securities offering.

Investment-advisers typically operate on a “2/20” model – meaning a 2% annual management fee on the assets resulting from the funds raised in the offering and an upside profit-share of 20% in the profits of the business/investment (referred to in securities lingo as “carried interest” – it’s called that as it’s your interest in the success of the venture, so don’t confuse it with interest-rate or a commission on the deal). This falls under the Investment Advisers Act of 1940. Thus, under this model it is not necessary (or advisable) to be a BD or a branch-office of one. Starting an IA is generally free as you are usually initially exempt from federal and state registration requirements due to de minimis exemptions. Even when you do hit the threshold for state or SEC registration, the costs are minuscule compared to those associated with operating a broker-dealer.

Ad/Listing services might charge a listing fee that is non-refundable and/or a fixed transaction fee for processing data and/or other types of fees which are not (and cannot be) contingent upon the success of the deal. Issuers come to the platform and agree to pay the ad or listing fees (if any) for displaying their offering. The platform focuses on marketing itself and providing general solicitation services to issuers who engage them. They get no compensation in the form of commissions, fund management fees or carried interest like broker-dealers or investment advisers do. Thus, under this model it is not necessary (or advisable) to be a BD or a branch-office of one.

Interesting: investment advisers and broker-dealers can post the offerings or deals they are selling on listing services platforms. Some such platforms are even aggregating (re-displaying) offerings which are displayed on other platforms. My next article will discuss various forms of syndication.

Issuer-Direct websites (platforms) are run by businesses (e.g. real estate developers, technology incubators and others) to solicit investors for their own deals, and as such don’t charge any fees at all. They are just platforms that list and advertise the offerings to prospective investors as allowed in 506-D and Reg A offerings. These platforms are not subject to any specific regulatory memberships or oversight, though of course the securities themselves still have to comply with the requirements of the Securities Act of 1933 (’33 Act), and the sale of those securities has to comply with each of the 50 “mini-SEC’s” state laws regarding securities dealers. Under this model it is not necessary (or advisable) to be a BD or a branch-office of one (but almost always necessary to engage one to “sell” your securities to states residents).

Why not just go ahead and operate as a broker-dealer even if you really don’t have to? Because unless you’re already a broker-dealer then your expertise is likely elsewhere, it’s not what you do, and the added burden of regulatory compliance can be debilitating to your business and to the offerings your promote; and registered representatives can’t share fees with non-registered persons anyhow. So stick with what you know, and hire other firms to do what they do.

But don’t offerings displayed on platforms have to be under the control of/underwritten by a broker-dealer? No.

So, is my business model legal? Here are a few guidelines…
If operating as an investment advisor, listing service or issuer direct - do not charge fees based upon the amount or success of the offering and don’t make specific investor recommendations (as opposed to general solicitation, which is fine). Engage a broker-dealer to assist you with various federal and state compliance tasks.
If you are operating as a broker-dealer – do not pay anyone (neither individuals nor businesses) any portion of the compensation you are receiving unless they too are registered and you have specific approval to do so from your broker-dealer.
But…as always…check with your securities attorney before you do anything.

SEC OK’s Start-Ups’ Use of Social Media

Posted on July 2, 2015July 2, 2015 by admin

Trying to figure out how many investors might want to fund your small business? Go ahead and tweet about it.

The US Securities & Exchange Commission (SEC) has given a social media greenlight to startups seeking to raise money and this week updated rules allowing for use of Twitter and other social media tools to solicit investors.

The Division of Corporate Finance announced that tweets of 140 characters or less are a proper way for a startup to gauge potential investor interest in a stock or debt offering. The posting must include a link to a disclaimer that says the firm isn’t yet selling securities.

If you are interesting in equity opportunities with start-ups, click here. Brokerdealer.com is the leading database for broker-dealers that want to help you.

Bloomberg noted that the SEC has been warming up to social media since April 2013, when it approved the use of posts on Facebook and Twitter to communicate corporate announcements such as earnings. Its latest endorsement of social media applies only to companies looking to raise up to $50 million a year.

Firms that use Twitter to solicit investor interest must include a link to a required disclaimer that says the firm isn’t yet selling securities, the SEC said in this week’s announcement.

It’s not clear how many companies will take advantage of the higher fundraising cap. Fewer than 30 offerings were made from 2012 to 2014, when the limit was $5 million, according to the SEC.

This post is from raisemoney.com.

SEC Busts Boca Raton For Unregistered Broker-Dealer Activity

Posted on June 27, 2015 by admin

The Securities and Exchange Commission said Tuesday that it has charged two firms with illegally brokering more than $79 million of investments from foreigners seeking U.S. residency through the government’s EB-5 Immigrant Investor Program.

The charges, the first against brokers handling investments in the EB-5 program, follow earlier SEC actions against fraudulent EB-5 offerings.

To get connect with Brokers and Investors today, click here. Brokerdealer.com is a great opportunity for better investments.

Ireeco LLC, originally of Boca Raton, Florida, and its successor Ireeco Ltd., a Hong Kong-based company operating in the U.S., were charged with acting as unregistered brokers for 158 EB-5 investors. The EB-5 program, administered by the U.S. Citizenship and Immigration Services (USCIS), provides a path to legal residency for foreigners who invest directly in a U.S. business or private “regional centers” that promote economic development in specific areas and industries, the SEC states. According to the SEC’s order, Ireeco LLC and Ireeco Ltd. used their website to solicit EB-5 investors, some of whom were already in the U.S. on a temporary visa.

The two companies offered to help potential EB-5 applicants choose the right regional centers. The centers paid the companies commissions of about $35,000 per investor once U.S. Citizenship and Immigration Services approved the green card petition, according to the SEC.

To read the full article by the South Florida Business Journal, click here.

Rules on Foreign Finders Incorportated In Recent SEC Approval

Posted on June 25, 2015 by admin

The longstanding rules on foreign finders – when a brokerage firm can pay transaction-based compensation to a non-registered foreign finder – will be incorporated into new FINRA Rule 2040, effective August 24, 2015.

Rule 2040(c) replaces NASD Rule 1060(b) and NYSE Interpretation 345(a)(i)/03, and provides that a member firm and persons associated with a member firm may pay transaction related compensation to non-registered foreign finders where the finders’ sole involvement is the initial referral to the member firm of non-U.S. customers, and the member firm complies with all the conditions set forth in the rule.

If you are in need for additional assistance as a result of FINRA rule 2040, click here. Brokerdealer.com is a global database to find a brokerdelaer that can help you.

Based solely on its activities in compliance with Rule 2040(c), a foreign finder would not be considered an associated person of the member firm. However, unless otherwise permitted by the federal securities laws or FINRA rules, a person who receives commissions or other transaction-based compensation in connection with securities transactions generally has to be a registered broker-dealer or an appropriately registered associated person of a broker-dealer who is supervised by a broker-dealer. Member firms that engage foreign finders would be required to have reasonable procedures that appropriately address the limited scope of activities permissible under such arrangements.

Where an arrangement with a foreign individual goes beyond initial referrals, the member firm may register that individual as a foreign associate under NASD Rule 1100. Foreign associates must conduct all of their activities outside the US and cannot engage in any securities activities with US persons. Although deemed an associated person for whom a Form U4 must be filed, a foreign associate is not required to pass a qualifying examination. For arrangements with foreign groups whose activities for foreign customers go beyond the initial referral to the member, registration of a foreign branch may be an alternative. To the extent a foreign finder solicits or negotiates with US persons, entering into a 15a-6 agreement may be a viable alternative.

To read the full article, click here.

SEC Bags 3 Dozen BrokerDealers in Muni Bond Underwriter Sweep; Siebert & Loop Snagged

Posted on June 21, 2015June 21, 2015 by admin

BrokerDealer.com profiles what could be called a “Muni Day Massacre” as the SEC just announced settlement with 36 municipal bond underwriting firms – for a total of $9.3 million– for offerings which they disclosed under the MCDC had compliance violations. The SEC sweep scooped up several MWBE-certified firms, including Siebert Brandford Shank & Co., LLC, which was fined $240,000 and Chicago-based Loop Capital Markets, LLC was fined $60,000.

Here is the official press release from the SEC:

June 18 2015–The Securities and Exchange Commission today announced enforcement actions against 36 municipal underwriting firms for violations in municipal bond offerings. The cases are the first brought against underwriters under the Municipalities Continuing Disclosure Cooperation (MCDC) Initiative, a voluntary self-reporting program targeting material misstatements and omissions in municipal bond offering documents.

“The MCDC initiative has already resulted in significant improvements to the municipal securities market, including heightened awareness of issuers’ disclosure obligations and enhanced disclosure policies and procedures,” said SEC Chair Mary Jo White. “This ongoing enforcement initiative will continue to bring lasting changes to the municipal securities markets for the benefit of investors.”

In today’s actions, the SEC alleged that between 2010 and 2014 the 36 firms violated federal securities laws by selling municipal bonds using offering documents that contained materially false statements or omissions about the bond issuers’ compliance with continuing disclosure obligations. The underwriting firms also allegedly failed to conduct adequate due diligence to identify the misstatements and omissions before offering and selling the bonds to their

“The settlements announced today reflect these underwriters’ cooperation in self-reporting their own misconduct and agreeing to improve their procedures going forward,” said LeeAnn Ghazil Gaunt, Chief of the Enforcement Division’s Municipal Securities and Public Pensions Unit. “Because these 36 firms underwrite a substantial portion of the country’s municipal bonds each year, we expect a large number of bondholders will benefit from the resulting improvements in due diligence and disclosure.”

As still remains customary within the wacky regulatory scheme in which the SEC deals with broker-dealers, the 36 firms did not admit or deny the findings, but agreed to cease and desist from such violations in the future. Under the terms of the MCDC initiative, they will pay civil penalties based on the number and size of the fraudulent offerings identified, up to a cap based on the size of the firm. The maximum penalty imposed is $500,000. In addition, each firm agreed to retain an independent consultant to review its policies and procedures on due diligence for municipal securities underwriting.

The MCDC initiative, which is continuing, is being coordinated by Kevin Guerrero of the Enforcement Division’s Municipal Securities and Public Pensions Unit. * * *

Link to the SEC’s orders and penalty amounts:

The Baker Group, LP – $250,000
B.C. Ziegler and Company – $250,000
Benchmark Securities, LLC – $100,000
Bernardi Securities, Inc. – $100,000
BMO Capital Markets GKST Inc. – $250,000
BNY Mellon Capital Markets, LLC – $120,000
BOSC, Inc. – $250,000
Central States Capital Markets, LLC – $60,000
Citigroup Global Markets Inc. – $500,000
City Securities Corporation – $250,000
Davenport & Company LLC – $80,000
Dougherty & Co. LLC – $250,000
First National Capital Markets, Inc. – $100,000
George K. Baum & Company – $250,000
Goldman, Sachs & Co. – $500,000
Hutchinson, Shockey, Erley & Co. – $220,000
J.P. Morgan Securities LLC – $500,000
L.J. Hart and Company – $100,000
Loop Capital Markets, LLC – $60,000
Martin Nelson & Co., Inc. – $100,000
Merchant Capital, L.L.C. – $100,000
Merrill Lynch, Pierce, Fenner & Smith Incorporated – $500,000
Morgan Stanley & Co. LLC – $500,000
The Northern Trust Company – $60,000
Oppenheimer & Co. Inc. – $400,000
Piper Jaffray & Co. – $500,000
Raymond James & Associates, Inc. – $500,000
RBC Capital Markets, LLC – $500,000
Robert W. Baird & Co. Incorporated – $500,000
Siebert Brandford Shank & Co., LLC – $240,000
Smith Hayes Financial Services Corporation – $40,000
Stephens Inc. – $400,000
Sterne, Agee & Leach, Inc. – $80,000
Stifel, Nicolaus & Company, Inc. – $500,000
Wells Nelson & Associates, LLC – $100,000
William Blair & Co., L.L.C. – $80,000