SEC Trading and Markets FAQ: Broker-Dealer Registration Exemption — SEC — US

Oct. 11, 2017

February 5, 2013

In these Frequently Asked Questions (FAQs), the Division of Trading and Markets (staff) is providing guidance on the exemption from broker-dealer registration in Title II of the Jumpstart Our Business Startups Act (JOBS Act). These FAQs are not rules, regulations or statements of the Commission. The Commission has neither approved nor disapproved these FAQs.

The staff may update these questions and answers periodically. In each update, the questions added after publication of the last version will be marked with “MODIFIED” or “NEW.” In addition, the Commission is soliciting public comments on regulatory initiatives under the JOBS Act.

For Further Information Contact: Any of the following at (202) 551-5550: David W. Blass, Chief Counsel; Joseph Furey, Assistant Chief Counsel; Joanne Rutkowski, Branch Chief; or Tim White, Special Counsel, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-7010.

Background

These FAQs address questions about the exemption from broker-dealer registration in Title II of the JOBS Act.

Section 201(a)(1) of the JOBS Act directs the SEC to revise its rules issued in Rule 506 under the Securities Act of 1933 (“Securities Act”) to provide that the prohibition against general solicitation or general advertising contained in Securities Act Rule 502(c) shall not apply to offers and sales of securities made pursuant to Rule 506, provided that all purchasers of the securities are accredited investors. Section 201(a)(1) further states that such rules shall require the issuer to take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the Commission.

Section 201(c) of the JOBS Act adds new paragraph (b) to Section 4 of the Securities Act. Section 4(b) of the Securities Act states that:

(1) With respect to securities offered and sold in compliance with Rule 506 of Regulation D under [the Securities Act], no person who meets the conditions set forth in paragraph (2) shall be subject to registration as a broker or dealer pursuant to section 15(a)(1) of this title, solely because—

(A) that person maintains a platform or mechanism that permits the offer, sale, purchase, or negotiation of or with respect to securities, or permits general solicitation, general advertisements, or similar or related activities by issuers of such securities, whether online, in person, or through other means;

(B) that person or any person associated with that person co-invests in such securities; or

(2) The exemption provided in paragraph (1) shall apply to any person described in such paragraph if—

(A) such person and each person associated with that person receives no compensation in connection the purchase or sale of such security;

(B) such person and each person associated with that person does not have possession of customer funds or securities in connection with the purchase or sale of such security; and

(C) such person is not subject to a statutory disqualification as defined in section 3(a)(39) of this title and does not have any person associated with that person to such a statutory disqualification.

(3) For the purposes of this subsection, the term ‘ancillary services’ means—

(A) the provision of due diligence services, in connection with the offer, sale, purchase, or negotiation of such security, so long as such services do not include, for separate compensation, investment advice or recommendations to issuers or investors; and

(B) the provision of standardized documents to the issuers and investors, so long as such person or entity does not negotiate the terms of the issuance for and on behalf of third parties and issuers are not required to use the standardized documents as a condition of using the service.

Responses to Frequently Asked Questions

Question 1

Can I rely on the exemption from broker-dealer registration in Securities Act Section 4(b) before the SEC adopts rules to eliminate the ban in Rule 506 on general solicitation?

Answer

Yes. The exemption from broker-dealer registration in Section 4(b) does not require the SEC to issue or adopt any rules. You cannot permit an issuer to conduct a general solicitation of a Rule 506 offering on your platform, however, until the SEC’s rules permitting those activities for a Rule 506 offering are adopted.1

Question 2

Broker-dealers are required to register under the Securities Exchange Act of 1934 (“Exchange Act”), but Securities Act Section 4(b) provides an exemption from the broker-dealer registration requirements in the Securities Act. Does that mean that the exemption from broker-dealer registration in Section 4(b) is not operational?

Answer

No. Congress exempted persons described in Section 4(b) from the broker-dealer registration requirements under Section 15(a)(1) of the Exchange Act. The staff views the exemption to be fully operational.

Question 3

Is the exemption in Section 4(b) available to a platform that offers and sells securities other than those offered and sold under Rule 506 of Regulation D?

Answer

No. The exemption from broker-dealer registration in Securities Act Section 4(b) only applies when securities are offered and sold under Rule 506 of Regulation D.

Question 4

Section 4(b)(1)(A) allows a person to “maintain a platform or mechanism that permits the offer, sale, purchase, or negotiation of or with respect to securities, or permits general solicitation, general advertisements, or similar or related activities by issuers of such securities, whether online, in person, or through other means.” Would an Internet website or social media qualify as a “platform or mechanism”?

Answer

Yes. We believe that Congress specifically intended to capture social media and Internet websites when it enacted Section 4(b)(1)(A).

Question 5

The exemption in Securities Act Section 4(b) is not available to anyone who receives (or whose associated persons receive) “compensation in connection with the purchase or sale of such security.” What forms of compensation would cause me to be unable to rely on the exemption?

Answer

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).

Question 6

May an entity, such as a venture capital fund or its adviser, operate an Internet website where it lists offerings of securities by potential portfolio companies (in compliance with Rule 506), co-invest in those securities with other investors, and provide standardized documents for use by issuers and investors, rely on Securities Act Section 4(b) to not register as a broker-dealer?

Answer

Yes. These activities are permitted under Section 4(b), subject to the conditions set forth in Section 4(b)(2), including the prohibition on receiving compensation in connection with the purchase or sale of securities. As a practical matter, we believe that the prohibition on compensation makes it unlikely that a person outside the venture capital area would be able to rely on the exemption from broker-dealer registration.

Question 7

Could an associated person of an issuer of Rule 506 securities rely on the exemption under Section 4(b) to maintain a “platform or mechanism” for the issuer’s securities?

Answer

Yes. Assuming the associated person otherwise qualifies for the exemption, including the condition prohibiting the receipt of any compensation in connection with the purchase or sale of securities, Section 4(b) does not limit the types of persons who are permitted to maintain a platform or mechanism.

Question 8

In some instances, a complex of privately offered funds may have an internal marketing department or use the investor relations department of an affiliated adviser or other entity whose staff is paid a salary to promote, offer, and sell shares of the privately offered funds. Can these persons rely on the exemption from broker-dealer registration in Section 4(b) if the funds are offered and sold pursuant to Rule 506?

Answer

No. Any salary paid to a person for engaging in these activities is compensation to that person in connection with the purchase or sale of securities. As a result, that person would not be able to rely on the exemption from registration as a broker-dealer provided in Section 4(b).

The Commission has previously noted that persons who market interests in a private fund may be subject to the registration requirements of Section 15(a)(1) under the Exchange Act.2

Question 9

Does the exemption from the requirement to register as a broker-dealer mean that the persons engaging in the activities described in Section 4(b)(1) are not brokers or dealers?

Answer.

No. Section 4(b) provides an exemption from registration, not an exclusion from the definition of the term “broker” or “dealer.” Whether someone is a broker or dealer requires a separate analysis based on the particular facts and circumstances presented. The Guide to Broker-Dealer Registration provides staff guidance on the types of activities that may bring a person within the meaning of the term broker or dealer. Although an exemption from registration means that a person would not have to comply with obligations incumbent on a registered broker or dealer, some portions of the federal securities laws apply to brokers or dealers regardless of registration.

Question 10

Does the exemption in Section 4(b) also provide an exemption from state registration requirements?

Answer

No. Title II does not exempt the persons described in Section 4(b) from any state registration requirements.

1The Commission has proposed rules to eliminate the prohibition against general solicitation and general advertising in securities offerings conducted pursuant to Rule 506 of Regulation D under the Securities Act and Rule 144A under the Securities Act, as required by Section 201(a) of the JOBS Act. See Securities Act Release No. 9354 (Aug. 29, 2012), available at http://www.sec.gov/rules/proposed/2012/33-9354.pdf.

2See, e.g., Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With less Than $150 Million in Assets Under Management, and Foreign Private Advisers, Investment Advisers Act Release No. 3222 (Jun. 22, 2011) 76 FR 39646, n.9 (Jul. 6, 2011) (to be codified at 17 CFR pt. 275), available at http://www.sec.gov/rules/final/2011/ia-3222.pdf.

Last Reviewed or Updated: Feb. 6, 2013