In a proceeding on September 28th, the SEC ordered a public hearing to be held before an Administrative Law Judge within the next two months. Further, the SEC ordered the Respondent and two companies under his control, to cease and desist from any engaging in any unlicensed and/or criminal acts of securities dealing.
The Respondent was previously sanctioned by regulators in two states for fraudulent conduct in the offering of unregistered securities and making misrepresentations as to his status as a registered broker-dealer. In its release, the SEC emphasizes the Respondent’s use of crowdfunding channels to find small business customers and offer purported expert brokerage services. His companies offered support in identifying prospective investors, raising capital, listing securities, structuring offerings, transferring stock and a number of related services. The SEC found that, in so doing, the Respondent fraudulently misrepresented his companies to small business owners as registered broker-dealers and established financial services companies with experience facilitating exempt offerings and the capacity to provide legal counsel.
The Respondent advised and assisted customers in filing Regulation A offering statements that were deemed to be deficient by the SEC. The SEC requests a public hearing to take evidence regarding possible violations of Section 10(b) of the Securities Exchange Act, including the fraud provisions of Rule 10b-5.
Although the transactions involved were small, the SEC’s vigorously worded release shows that, although the JOBS Act relaxes restrictions on communications with potential investors during certain securities offerings, the Act does not limit the SEC’s broker-dealer registration requirements.
The SEC has expressly distinguished brokers who collect transaction based compensation to promote, offer and sell shares of private stock offerings from the persons protected by Section 201(b) of the JOBS Act. As explained in detail here, a “matchmaking” site that takes no compensation and does not handle or analyze securities in providing ancillary services in connection with a Rule 506 Regulation D offering can be exempt from broker-dealer registration. However, this exception has been narrowly interpreted, and the SEC has been aggressive in enforcing requirements for broker-dealer registration under Section 4(b) of the Securities Act.
The SEC has yet to finalize its rules relating to crowdfunding. When such regulations are in place, funding portals would be subject to an alternative regulatory scheme.
All industry participants, and companies seeking capital, will want to verify that the purported broker-dealers with whom they work are appropriately registered broker-dealers. For smaller and newer firms that are seeking to understand their responsibilities, the SEC’s Division of Trading and Markets maintains a Compliance Guide, which sets forth the SEC’s views as to the circumstances in which the SEC believes that intermediaries must register as broker-dealers. Caution is appropriate, as the SEC is expected to maintain its scrutiny of the area.