Researchers themselves are exposed to significant risks, including the risk of SEC sanctions. In particular, a company could claim that its obligations to an intermediary under the intermediary agreement are void if the intermediary violates the federal and state registration requirement for broker-dealers. A company could revoke its letter of commitment with the intermediary and the intermediary could be excluded from the collection of its fees. An intermediary`s failure to disclose the fact that he is not registered as a broker-dealer could be characterized as a misleading omission, even in enforcement proceedings or private disputes, amounting to fraud against the company. If a promoter or intermediary that is not duly authorized transfers a business to persons or organizations willing to take an interest in the Company, and the Company provides such promoter or intermediary with cash, stock or other costs, the promoter or intermediary may be subject to civil liability and/or criminal prosecution under federal and Ohio securities laws. movables. Civil damages may include all fees paid to advise the Organizer or The Intermediary, losses due to such advice, legal costs and any income arising from such advice. In Ohio, a data subject may bring a civil liability action for such a breach within four (4) years of the investment advice or two (2) years after the facts constituting such a breach are discovered, whichever is shorter. If the promoter or intermediary is sued, that person may be prosecuted and/or liable to fines which vary according to the value of the funds or securities in question. On several occasions, we have met finders referring to a no-share letter issued by the SEC in 2014 to prove that they can receive a commission even if they are not a licensed broker-dealer.

The problem with this position is that the letter contains several conditions, including the fact that after the sale of the securities, the buyer of the securities for sale must (i) have control of the company and (ii) actively operate the company. Almost all seed funding doesn`t fit this scenario, so the no-action letter doesn`t apply.2 While the startup feels like it`s not such a bad thing, a violation of federal securities laws can also invalidate (or make voidable) the agreement between the startup and the investors under whom the startup raised the funds. If the agreements are annulled by a court, all parties to those agreements would have a right of withdrawal that would apply for a subsequent period of three years from the transaction or one year from the date of discovery of the breach. An annual renewal statement must be filed, including an affirmative statement by the Intermediary that the Intermediary has complied and will continue to comply with the terms of Section 25206.1(a) and will not be involved in any particular illegal securities activity, and that the Intermediary has obtained a written agreement with each Investor with respect to any transaction in which the Intermediary has participated in the preceding twelve months. A deposit fee of $275 is required for each renewal statement. In addition, the SEC`s Advisory Committee on Small and Emerging Businesses (“the Committee”) has reviewed the development of a less onerous regulatory system for investment agents, intermediaries and M&A brokers. In a presentation to the committee on June 3, 2015, Gregory C. Yadley notes that the broker-dealer registration process is too cumbersome for intermediaries and that an exception or separate registration process should be provided.23 Mr. Yadley noted in his presentation that the current broker-dealer registration system is overwhelming; A researcher working for small businesses would find it inappropriate to maintain a minimum net capital, provide audited financial statements, or maintain the compliance infrastructure required for a full-service brokerage firm.24 The SEC, finra, American Bar Association, and NASAA have all been involved in discussions on the subject. The FINRA CAB rules represent a regulatory measure to address these concerns, but there remains potential for collaboration and additional regulatory action.

Companies that pay intermediaries may also be in hot water, both in the form of state aid liability under Section 21 of the Foreign Exchange Act and for directly causing violations of Section 15(a), as Ranieri Partners LLC learned in 2013. Level I detectors fit comfortably into the parameters of authorized researchers described in the no-action letters of dry personnel, and are unlikely to be a source of controversy. ii While most SEC enforcement actions against unregistered intermediaries are prosecuted in cases involving additional securities violations, such as fraud or misappropriation of investors` assets, the SEC has from time to time sued the intermediaries based solely or primarily on their status as unregistered dealers. For example, in 2013, the SEC again filed a lawsuit against a private fund advisor, its managing partner and an advisor who asked investors to act as unregistered dealers and, in the case of the managing partner, to facilitate violations by providing documents to the advisor and not preventing him from having significant contacts with investors in the negotiations. SEC, In William M. Stephens, No. 3-15233 (March 8, 2013); SEC, In Ranieri Partners LLC and Donald W. Philips, No. 3-15234 (March 8, 2013).

Another source of compliance for researchers in California is registration as an intermediary under state law. Under these terms, intermediaries may receive compensation without full registration of broker-dealers if they (among other things) register with the crown and pay initial and annual fees, enter into a written agreement with clients and make certain disclosures to clients, and limit the scope of the transaction to $15 million.viii The exemption only applies to transactions involving only qualified investors and having a total purchase price of $15 million or less. California-registered intermediaries may engage in limited activities and may not (among other things) participate in trading, hold investor funds, perform due diligence, sell their own interests in the transaction, or disclose more than limited information about the issuer. It is important to note that this exemption is without prejudice to federal law governing broker-dealers, and the exception would therefore not apply unless all transaction and promotional activities, the issuer, intermediary and investors are located within the boundaries of the State. It is not clear whether the SEC itself in this case would have (or claim) jurisdiction over intermediaries acting as unregistered brokers. manage securities, cash or other aspects of securities transactions. The proposed exemption provides much-needed clarification on the role of intermediaries. In addition, the proposed Tier II category of intermediaries would allow intermediaries to work more effectively in their efforts to help private issuers raise funds. There is a proven need to find intermediaries in many private financings, and the SEC`s proposal aims to strike a reasonable balance between meeting this need and protecting investors from unscrupulous sales activities. However, given the split within the Commission and the timing, it is likely that the proposal will prove controversial in some quarters and may be amended before it is adopted. Finally, it is important to keep in mind that if the exemption is passed, it will only apply to federal registration requirements for brokers and brokers, and researchers should assess whether the requirements may apply under applicable state law.

You`re probably thinking, “What if a researcher receives a percentage of the money raised through intermediary launches, but doesn`t make recommendations, has no history of selling securities, and doesn`t play an active role in investor-issuer negotiations?” While it has focused on four factors, the SEC has stated in several no-action letters that transaction-based compensation is a trademark of a broker-dealer, even though the other three factors are missing. .