Navigating SEC and FINRA Compliance & Registration

If you are thinking of becoming a Broker Dealer, you probably have many questions that need answering, ideas you would like to discuss, and require a solid understanding of how it may impact your unique situation and infrastructure.

Full-Service Support for Broker Dealers

Compliance Exchange Group (CXG) provides a full-service Broker Dealer compliance operation. We can help you with everything from all the required paperwork to compliance with FINRA.

Our exceptional talent, expertise with everything Broker Dealer, and many years of successful FINRA approvals are just some of the reasons why people choose CXG to help them become Broker Dealers.

Book an appointment with one of our highly trained professionals to discuss your firm, goals and requirements.

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What is a Broker Dealer – SEC Definition

Understanding How the SEC Defines a Broker Dealer

A Broker is any person or entity engaged in the business of buying or selling securities for the account of others. A Dealer is any person or entity engaged in the business of buying or selling securities, but for their own account. Identifying when a person is acting as a Broker or a Dealer is important because generally the SEC requires Broker Dealers register their firms.

Activities Requiring Broker Dealer Registration

Certain activities, such as finding investors, operating trading platforms, or facilitating securities transactions, may require Broker Dealer registration.

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Someone who trades securities for others could be a Broker. In addition, other activities could require someone to register as a Broker Dealer, including but not limited to:

• Finding investors for companies or for funding rounds
• Finding buyers and sellers of businesses
• Operating a platform enabling trading of securities
• Providing support services to registered Broker Dealers
• Receiving fees from other Broker Dealers

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To determine whether someone is a Broker, consider, for example, whether they:

• Participate in important parts of the transaction, like solicitation, negotiation, or execution
• Receive commissions or compensation based on the outcome or size of the transaction
• Engage in the business of facilitating the buying and selling of securities
• Handle securities or funds of others in connection with securities transactions

If so, they likely are acting as a Broker and would have to register with the SEC.

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When Do Small Businesses Use a Registered Broker Dealer?

Leveraging Broker Dealers for Small Business Investment Needs

Early-stage businesses may encounter challenges connecting with investors.  Broker Dealers may be able to help bridge the gap between small businesses and potential investors.  A person or firm may need to be registered as a Broker Dealer if a company intends to pay them transaction-related compensation to help with transactions like the following:

• Raise capital from investors
• Sell the company
• Engage in another type of liquidity transaction

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Understanding Issuer Exemptions

If a company sells its own securities, would that make it a Broker Dealer?

Issuer

A company issuing its own securities, sometimes called an issuer, generally is not acting as a Broker because it is selling securities for its own account and not for the account of others.

An issuer generally is not considered a Dealer because it does not buy and sell its securities for its own account as part of its regular business.

An issuer whose activities go beyond selling its securities, however, such as purchasing its securities from investors or effectively operating a market in its own securities, should consider whether it would need to register as a Broker Dealer.

Also, a person or company who is raising capital or selling securities of an issuer generally needs to register as a Broker Dealer, even if they are employed by the issuer.

Consulting companies who are hired by an issuer to assist in raising capital or selling securities are also generally required to register as a Broker Dealer.

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Activities Requiring Registration

Key Factors Determining Broker Dealer Registration

The following factors are typical of Broker activity where the person involved may need to be a registered Broker Dealer:

1. Participates in discussions and negotiations between the issuer and the potential investors;
2. Assists in structuring transactions;
3. Receives transaction-based compensation, i.e., a commission or some form of compensation that varies with the size or type of the resulting investment;
4. Engages in “pre-screening” potential investors to determine their eligibility to purchase securities;
5. Engages in “pre-selling” the issuance to gauge the level of interest;
6. Conducts or assists with the sale of securities;
7. Provides advice regarding the value of securities;
8. Locates issuers on behalf of investors; speaks or communicates directly with potential investors (individual or institutional)
9. Solicits new clients;
10. Disseminates quotes for securities or other pricing information;
11. Actively (rather than passively) finds investors;
12. Sends private placement memoranda, subscription documents, and due diligence materials to potential investors;
13. Advises on portfolio allocations to accommodate an investment;
14. Provides analyses of potential investments; and
15. Provides potential investors with confidential information identifying other investors and their capital commitments.

As these lists demonstrate, there is very little that a finder may do without crossing the line into activities that may trigger the requirement to register as a Broker Dealer. No single factor alone will determine whether a finder should register as a Broker Dealer; all existing factors are considered together in making such a determination.

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Consequences of Using Unregistered Brokers

Legal Implications of Unregistered Broker Usage

A company or its personnel who do not comply with the requirements for Broker Dealer registration and other securities laws could be subject to legal repercussions, including:

• Civil or criminal lawsuit
• Rescission
• Future capital raising challenges

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How to Verify Broker Dealer Registration

Ensuring FINRA and SEC Registration Compliance

Brokers generally must register with the SEC and become members of the Financial Industry Regulatory Authority (FINRA).  Find out if your Broker or investment professional is licensed and registered using this free search tool available on investor.gov.  Always check out both the person as well as the firm.  You can also visit FINRA’s BrokerCheck program and/or your state securities regulator.

For more detail about the issuer’s exemption and associated persons of issuers, and to learn more about Broker Dealer registration, including limited exemptions for certain activities, please review the Broker Dealer Registration Guide.

Source for What is a BrokerDealer – SEC definition above

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