February 20, William H. Caffee. White Summers Caffee & James, LLP 805 SW Broadway, Suite 2440 Portland, Oregon /

Transcription

1 February 20, 2013 William H. Caffee White Summers Caffee & James, LLP 805 SW Broadway, Suite 2440 Portland, Oregon /

2 What is the Problem? 2

3 3 You need a license to sell Securities Under Section 15(a)(1) of the Securities Exchange Act of 1934, it is unlawful for any broker or dealer to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security unless such broker or dealer is registered with the SEC.

4 4 Who is a Broker? Section 3(a)(4)(A) of the Exchange Act defines a broker as any person engaged in the business of effecting transactions in securities for the account of others. Section 3(a)(5)(A) defines a dealer as any person engaged in the business of buying and selling securities for his own account.

5 There are no di minimus exceptions to either definition. 5

6 6 The Good : The Registered Broker-dealer requirements impose significant burdens - Broker-dealers, whether individuals or businesses, must register with the SEC by filing an application on Form BD, pass some tests and post a surety bond. Generally, each registered broker-dealer must also be a member of the Financial Industry Regulatory Authority (FINRA) and the Securities Investor Protection Corporation. In addition, each state has its own requirements for people conducting business as a broker-dealer in that state.

7 7 The Bad (or Misunderstood) Not everyone who is involved in a securities transaction needs a license. Agents of the Issuer Exception Rule 3a4-1 And

8 8 Finders -

9 9 Finders Transaction Based Compensation without Registering as a Broker-Dealer may or may not be permitted

10 10 The SEC s view is that Transaction Based Compensation Requires Registration as a Broker Guide to Broker-Dealer Registration, Division of Market Regulation, U.S. Securities and Exchange Commission, December marketreg/bdguide.htm#11

11 11 It all started with the Ottawa Senators Important factors identified by the SEC: Paul Anka had a bona fide, pre-existing business or personal relationship with these prospective investors. He reasonably believed those investors to be accredited. He would not advertise, endorse or solicit investors. He would have no personal contact with prospective investors. Only officers and directors of the Senators would contact the potential investors. Compensation paid to the Senators' officers and directors would comply with 1934 Act Rule 3a4-1.

12 12 It all started with the Ottawa Senators He would not provide financing for any investors. He would not advise on valuation. He would not perform due diligence on the Senators' offering. He had never been a broker-dealer or registered representative of a broker-dealer.

13 13 Then the SEC Restricted the Paul Anka No-Action Letter Ever since Paul Anka has come out, a lot of people in the private bar, a lot of people in the business industry, have felt that that given some sort of coverage to allow for what is thought of as the traditional providing an introduction between investors and an issuer, and being able to receive compensation for that. The truth is, from the staff point of view, there is no progeny of Paul Anka, in fact, and the ways we look at brokerdealer regulation today, I m not even sure we would issue the Paul Anka letter again. And so, [I] really don t think it s something that people out there doing transactions should be relying on. A lot of other letters that have come out where persons have asked to earn some form of transaction-based compensation and when you re talking about capital raising, there is not a lot of relief given. SEC staff at the SEC Government Business Capital Formation held November 20, 2008

14 14 Judges Not Ready to Accept SEC s View that Transaction Based Compensation Makes One a Broker SEC v. Kramer 778 F. Supp. 2d 1320 ( M. D. Florida 2011) Maiden Lane Partners v. Perseus Realty Partners unregistered broker sues for its fee, defendant says unenforceable pursuant to 29 (b) of Exchange Act, court says not clear Perseus recommended Maiden Lane or that they were involved in key points in the chain of distribution or in negotiating any transactions, therefore not clear that Maiden Lane was a broker. Summary judgment denied.

15 15 SEC v. Kramer Kramer enters cooperative agreement to share fees with promoter of reverse merger company going public in pump and dump scheme. Kramer introduces public company (Skyway) to registered broker who raises money. Kramer paid in shares of Skyway by promoter when he and his friends invest. All shares sold by registered brokers. SEC says Kramer s a broker because he received transaction based compensation. Court says he had no active role in negotiations between Skyway and the broker who sold the shares and had not promoted the stock other than by saying it was a good company.

16 16 SEC v. Kramer Court says distinction between finder and broker remains largely unexplored, that case law and no-action letters are fact driven but rejects SEC s single factor test of transaction based compensation.

17 17 Conclusion Kramer and Maiden Lane cases seem to add support for the Paul Anka No-Action letter. Perhaps finders can be in the business of introducing investors to issuers if contacts limited to introductions and finder plays no role in communications with investors that could be seen as promoting a specific offering. However, SEC enforcement has not abated. State securities laws may prohibit payment by issuer of any kind for securities sales to non licensed broker (like Washington), permit rescission by investor if unlicensed broker involved (like California), or condition a useful exemption on nonpayment of commissions or finder s fees (like Oregon and Uniform Securities Act).

18 18 Do Business Brokers Need to Register? Not if they restrict business to asset sales Stock sales may be permitted if transaction started out as an asset sale and broker took no role in advising regarding structure Country Bus., Inc. No-Action Letter, 2006 WL No-Action Letters emphasize compensation must not depend on success of the transaction

19 19 What if You Don t Have a License (and Need One)? Problems for issuers Exchange Act Section 29 (b) provides that contracts made in violation of any provision of the Exchange Act are void (although courts treat such contracts as voidable not void ad initio). Problems for Brokers Increased Governmental Response to Unregistered Brokers (investigations, cease and desist orders, injunctions, civil penalties, disgorgement, criminal referral). Private right of rescission under 29 (b) Mills v. Electric Auto- Lite Co.

20 20 ABA Task Force Recommends Modified Broker Registration for Private Placements Citing the uncertainty in finder cases and practical need to finance small issues k%20force%20report%20- %20Private%20Placement%20Broker- Dealers% pdf

21 21 White Summers Caffee & James, LLP Pacific Northwest Office 805 SW Broadway, Suite 2440 Portland, Oregon Reception: 503/ Silicon Valley Office 541 Jefferson Ave., Suite 100 Redwood City, California Reception: 650/