I often hear intermediaries say, “I’m only offering unregistered securities, so I don’t have to be registered.” Wrong. Whether the securities are registered (’33 Act) has nothing to do with whether the individuals offering securities are required to be registered (’34 Act). “But I’m not offering securities; I only do M&A.” “My deals only involve one buyer and one seller.” That doesn’t change anything. “I’m not a broker. I’m a consultant.” The SEC and FINRA don’t care what title you give yourself. Go ahead and call yourself the Wizard of Oz.
The first question is whether you are ever acting as an intermediary in the offering of securities. Activities involving capital raising (public or private) require registration. Even if you never raise capital, you may still be involved in a securities transaction. If a private company is sold to another private company and the stock on the balance sheet is changing hands, then you are a party to a securities transaction. Even in the M&A world, if an unsecured seller’s note is part of the transaction, that too is a security.
If the SEC or state determines after a closing that you should have been registered, the consequences are dire.
The next issue is compensation. The SEC says that if you are assisting with a transaction involving securities and are paid based on transaction value then you are earning a commission on a securities transaction. Registration as a broker is required. Flat fees earned for advising do not require registration, but if you receive variable compensation without registration, you are running a risk. Even if you don’t initially expect a security will be involved, deal terms often change on short notice. There may be some relief provided under the SEC’s M&A no-action letter (Jan. 31, 2014), but it may be difficult to prove the intermediary is acting under the exact fact pattern contained in the no-action letter.
If the SEC or state determines after a closing that you should have been registered, the consequences are dire. You may not be paid upon a transaction closing because a party to the deal realizes you were not registered. Regulatory authorities may require rescission and disgorgement of profits. Fines may be levied, and cease-and-desist orders become public record. Such situations are low-hanging fruit for investor lawsuits. You have worked too long and hard to have your reputation ruined.
There are deals where registration is not required. Asset sales are not securities transactions. However, more institutional investors will not look at any deal offered by unregistered intermediaries. The lack of registration becomes a credibility issue, yet no regulations have been violated.
You have options to consider. You may choose to ignore the securities laws and operate as an unregistered intermediary. Or you may opt to form your own broker-dealer. The final option is to affiliate with an existing broker-dealer. There are pros and cons to each.
This article originally appeared in the Middle-Market Trends Report addition of Middle Market Growth. Find it in the MMG archive.
Carrie Wisniewski is a former FINRA examiner and the founder of B/D Compliance Associates, Inc. and Bridge Capital Associates, Inc. (member FINRA, SIPC). You can reach her at firstname.lastname@example.org.