Many transactions in the OTC Markets involve the work of Brokers, Finders and other Intermediaries serving as Consultants. Microcap companies often engage consultants to assist in marketing, investor relations, raising capital and introducing or closing M&A transactions.
Most often, consultants are not registered broker-dealers with the SEC. In many cases, registration as a Broker is not required. However, depending on the language of the agreements, how consultants are paid, and the actual work performed, there may be occasions when SEC registration is either advisable or mandated under the Securities Act.
Who Must Register with the SEC as a Broker?
Section 3(a)(4)(A) of the Securities Act of 1933 defines a “Broker” broadly as “any person engaged in the business of effecting transactions in securities for the account of others.”
Examples of Persons Who May Need to Register as a Broker
In its Guide to Broker Dealer Registration, the SEC provides examples of certain individuals or businesses that may need to register under the Securities Act. In typical microcap OTC Markets transactions, these may include “Finders” or “Consultants” if their activities include the following:
- Finding investors or clients for registered broker-dealers, investment companies (or mutual funds, including hedge funds) or other securities intermediaries;
- Making referrals to registered broker-dealers, investment companies, etc., or splitting commissions with them;
- Finding investment banking clients for registered broker-dealers;
- Finding Investors for “Issuers”, even in a consulting role;
- Engaging in, or finding investors for, venture capital or “angel” financing rounds, including private placements (PPMs);
- Finding buyers and sellers of businesses in reverse merger or acquisition transactions when the sale of securities (debt or equity) is involved;
- Acting as “Placement Agents” for private placements of securities;
How to Tell if a Finder Should Be Registered as a Broker with the SEC
If consultant fits into one of the examples above, the SEC looks at the actions or duties the person or business actually performs to determine if registration as a Broker is necessary. Some of the questions the SEC considers when examining the conduct of Finders or consultants include:
- Does the consultant participate in the solicitation, negotiation, or execution of the securities transaction?
- Does the consultant’s compensation depend upon, or is it determined by the outcome or size of the transaction or deal?
- Does the consultant receive trailing commissions, such as 12b-1 fees?
- Does the consultant receive any other transaction-related compensation?
- Is the consultant engaged in the business of effecting or facilitating securities transactions or is this a one-time deal?
- Does the consultant handle the securities or funds of others in connection with securities transactions?
According to the SEC’s compliance guidelines, if a consultant answers “yes” to any of these questions, they may need to register as a Broker.
Brokers Generally Must Register with the SEC under Section 15(a)(1)
Section 15(a)(1) of the Securities Act generally makes it unlawful for any Broker to “effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security” unless that Broker or dealer is registered with the SEC under Section 15(b) of the Securities Act.
Microcap Securities Attorney Matt Stout
OTC Bulletin Board and Pink Sheet Issuers and Consultants seeking compliance with SEC guidelines can contact securities regulation lawyer Matt Stout for a review of business practices, as well as existing contracts and agreements to determine if registration as a Broker under Section 15(b) is necessary at (410) 429-7076 or firstname.lastname@example.org.