Case Study of Online Funding as Related to Broker-Dealer Exemptions


As a recurring topic, I am discussing exemptions to the broker-dealer registration requirements for entities and individuals that assist companies in fundraising and related services.  On February 18th I published a blog about the new no-action-letter-based exemption for M&A brokers, the exemptions for websites restricted to accredited investors and for crowdfunding portals as part of the JOBS Act.  Further on, I wrote on the statutory exemption from the broker-dealer registration requirements found in Securities Exchange Act Rule 3a4-1, including for officers, directors and key employees of an issuer.

This blog addresses the statutory and related exemptions that affect, and would permit, the operation of a funding website, including the statutory exemption from broker-dealer registration enacted into law as part of the JOBS Act on April 5, 2012.  This blog also includes an analysis of a fictional funding website.

Summary of Exemption from Broker-Dealer Registration Found in Title II of the JOBS Act

Title II of the JOBS Act created a limited exemption to the broker-dealer registration requirements for certain intermediaries that facilitate Rule 506 offerings.  In particular, Section 4(b) of the Securities Act of 1933 (“Securities Act”) added an exemption to the broker-dealer registration requirements such that an individual or entity will not be deemed a broker-dealer as a result of the following:

  • (A)  That person maintains a platform or mechanism that permits the offer, sale, purchase, or negotiation of or with respect to securities, or permits general solicitations, general advertisements, or similar or related activities by issuers of such securities, whether online, in person, or through any other means ;
  • (B)  That person or any person associated with that person co-invests in such securities; or
  • (C)  That person or any person associated with that person provides ancillary services with respect to such securities.

Ancillary services are defined as (i) the provision of due diligence services, in connection with the offer, sale, purchase, or negotiation of such security, so long as such services do not include, for separate compensation, investment advice or recommendations to issuers or investors; and (ii) the provision of standardized documents to the issuers and investors, so long as such person or entity does not negotiate the terms of the issuance for and on behalf of third parties and issuers are not required to use the standardized documents as a condition of using the service.

The exemption from registration as a broker or dealer also requires that such person and each person associated with such person (i) does not receive any compensation in connection with the purchase or sale of the security; (ii) does not have possession of customer funds or securities in connection with the purchase or sale; and (iii) is not subject to statutory disqualification pursuant to Section 3(a)(39) of the Exchange Act (i.e., bad boy provisions).

SEC Guidance on the Title II Broker-Dealer Exemption

On February 5, 2013, the SEC issued guidance regarding the exemption from broker-dealer registration under Title II.  The SEC confirmed that the broker-dealer exemption does not pre-empt state law and accordingly, persons acting in reliance on the new exemption must also confirm compliance with any and all applicable state securities regulations.  State securities laws vary widely, including the laws related to broker-dealer registration.

Though the new statutory language appears self-evident, the SEC confirmed that the exemption is intended to apply to websites and social media sites as exempt platforms.

Although the SEC states that it interprets “compensation” very broadly to include any economic benefit, it notes that Congress specifically allowed for co-investing and accordingly, profits from such co-investments would not be considered compensation to disqualify this broker-dealer registration exemption.

Not only is it permissible for a venture capital fund or its adviser to operate a website where it lists offerings of securities by potential portfolio companies, co-invests in those securities with other investors, and provides standardized documents, the SEC believed from the start that this very scenario would dominate the use of the exemption.  The SEC acknowledged that the profitability of running such a website will likely come from the co-investment aspect as opposed to the relatively small fee that could be charged for a site listing.  The SEC stated, “[A]s a practical matter, we believe that the prohibition on compensation makes it unlikely that a person outside the venture capital area would be able to rely on the exemption from broker-dealer registration.”

The SEC prediction has proven true; successful funding platforms such as Realty Mogul, Fundrise and Circle Up all follow this co-investment formula.

Reliance on the exemption in Section 4(b) is not limited to use by any type of person, as long as they follow the rules, including not receiving compensation in association with the sale of securities.  Persons associated with issuers, including officers, directors and employees, can rely on the exemption and create websites advertising Rule 506 offerings.

On the other hand, if a privately offered fund, or syndicate of privately offered funds, pays a salary to an internal marketing person to operate such a website or platform, that person would be deemed to receive compensation and would not be able to rely on the new exemption.  The SEC goes further to note that they are of the view that persons who market interests in private funds may be subject to the broker-dealer registration requirements found in Section 15(a)(1) of the Exchange Act.  On a technical note, the SEC confirmed that the exemption is not an exclusion from the definition of broker-dealer.  Platforms and intermediaries operating under the new Section 4(b) may be (and most likely are) broker-dealers; they are just exempted from registering as such.

Section 3(a)(39) Statutory Disqualification

The theme of a “bad boy” disqualification appears in many areas of the securities laws and unfortunately, there are at least three different statutes or rules that set forth such disqualification, each of which is similar but not exactly the same.  The Dodd-Frank Act required the SEC to implement rules which disqualify certain Rule 506 offerings based on the individuals involved in the issuer and related parties.  On July 10, 2013, the SEC adopted such rules by amending portions of Rules 501 and 506 of Regulation D, promulgated under the Securities Act of 1933.  The new rules went into effect on September 10, 2013.  That rule is similar to Rule 262 of Regulation A disqualifying bad actors from participating in Regulation A offerings, in that it encompasses all of the bad actor disqualifications in Rule 262, but also adds additional disqualifying events.  In addition, the new rule did not modify the existing Rule 262 or other bad actor disqualification rules, but rather is limited to Rule 506 offerings.  For a complete discussion on the Rule 506 bad actor provisions, see my blog Here and a discussion of SEC guidance Here.

However, the Section 3(a)(39) disqualification is consistently used to disqualify persons that are relying on exemptions to broker-dealer registration, such as in the statutory exemption from the broker-dealer registration requirements found in Securities Exchange Act Rule 3a4-1, including for officers, directors and key employees of an issuer.

Section 3(a)(39) disqualifies any person who (i) is or has been expelled, suspended or barred from association with FINRA or another self-regulatory organization based on an order from such self-regulatory organization; (ii) is subject to an order from the SEC or other regulatory organization denying, suspending or barring registration as or association with a broker-dealer; (iii) is subject to an order from the CFTC denying, suspending or revoking registration under the Commodity Exchange Act; (iv) is subject to an equivalent order as the above from a foreign governmental or regulatory authority; (v) has been found to be the “cause” of an order described above; (vi) is associated with a person who is expelled, suspended or barred as set forth above;  (vii) has been convicted of a felony or other fraud-based securities law violation in the past 10 years; or (viii) has made a false or misleading statement or omission in any application to become associated with a broker-dealer or to become a broker-dealer.

Practical Application — a Case Study

I often represent clients that are establishing or have established funding websites under the Title II exemption.  Based on my experience, I have put together a case study analysis based on a fictional website called

An obvious initial starting point for review is to determine whether would be required to be registered with the SEC as a “broker” or “dealer” or “investment advisor” and further what facts or circumstances would alter my conclusion.  The following assumptions would support a conclusion that would not be required to register as a broker-dealer or investment advisor.

Important assumptions:

  • does not charge success- or transaction-based fees;
  • All ultimate securities purchase and sale transactions are conducted separate from and without any involvement (or possibly even knowledge) by;
  • will have no involvement in the negotiation of transactions or structure of offerings;
  • Other than the one-sided providing of the advertisement or solicitation, will not have any communications with potential investors regarding an investment;
  • does not provide any advice about the merits of a particular investment;
  • does not directly assist investors with the completion of a transaction;
  • does not handle funds or securities related to a transaction;
  • does not hold itself out as providing any securities related services other than as a listing and matching service;
  • will not draft the contents of advertisements or solicitations (although it can, and should, provide editorial and grammatical input and refuse to publish anything that is, on its face, fraudulent or offensive);
  • will charge a flat fee for services or fee structure for services, but will not charge separately for advertising and marketing investment opportunities;
  • will not make representations that it has verified the accuracy of the content of advertisements;
  • does not recommend or suggest that an investor make an investment in a particular issuer, other than to make such investor aware that such an opportunity exists;
  • does not require that its standardized documents be used as a condition to listing on its website; and
  • is not subject to a statutory disqualification under Section 3(a)(39).

The JOBS Act

As discussed above, the JOBS Act, as codified in Section 4(b) of the Securities Act of 1933, expressly provides that entities engaged in activities similar to those contemplated by are not required to register as a broker or a dealer. cannot collect compensation in connection with the purchase or sale of securities, take possession of customer funds or securities, or be either directly or through its associated persons statutorily disqualified.

Success-based compensation has always been an important factor in determining whether an entity is acting as a broker or dealer.  Success based compensation is analyzed by the SEC as “compensation for participation in the transaction that depends upon, or is it related to, the outcome or size of the transaction or deal.”  The language of Section 4(b) “in connection with” the purchase or sale of a security is a broader criterion.  Reading this together with the SEC guidance, would be limited to charging reasonable fees for its services, which fee would be the same irrespective of the size or character of the posted offering.

The less clear-cut provision is whether may engage in general solicitation on behalf of the issuer and be compensated for such services and whether engaging in such general solicitation for compensation results in the giving of investment advice or recommendations to issuers or investors.   My view is that can engage in solicitation on behalf of the issuer.

The exemption states,  “…maintains a platform or mechanism that permits the offer, sale, purchase, or negotiation of or with respect to securities, or permits general solicitations, general advertisements, or similar or related activities by issuers of such securities, whether online, in person, or through any other means…”

Although the plain reading of the statute indicates that the solicitation is to be performed by the issuer, it makes sense that the SEC is defining the responsible (and thus liable) party more than limiting who may actually perform the function.  As with any information that appears in the public domain about an issuer and on behalf of an issuer (for example, filings with the SEC or press releases), the issuer is and should be ultimately responsible for the truth and legality of the content. is providing a technologically-driven curation process whereby the recipient of deal information is curated based on algorithmic formulas; it is, in essence, a form of selling leads and data lists and the distribution of such information by “pushing the e-mail button.”  Irrespective of the JOBS Act, both of these functions are legal.

 No-Action Letter Support

Before the codification of the statute in the JOBS Act, lead generation through software and opt-in functions and resulting matching services were the subject of a series of no-action letters such as Angel Capital Electronic Network and Internet Capital Corporation which allow the operation of websites for the matching of potential investors with deals, so long as the information is password-protected and does not include general solicitation and advertising.  These no-action letters set forth the “matching services” exemption to broker-dealer registration.  There is no reason to believe that these no-action letters and the reasoning behind them changed, other than in favor of business, following the enactment of the JOBS Act.

Newsletter Exemption from Investment Advisor

Moreover, these services are arguably within the newsletter exemption from the definition of “investment advisor.”

The “newsletter” exemption as set forth in Section 202(a)(11) of the Investment Advisors Act of 1940 is as follows:

(11) ‘‘Investment adviser’’ means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities; but does not include ….. (D) the publisher of any bona fide newspaper, news magazine or business or financial publication of general and regular circulation;

However, will need to make sure that its marketing materials (the EM content) cannot be interpreted as either investment advice or a recommendation to invest.

The Exchange Act – Broker-Dealer Registration Requirement 

Section 15(a)(1) of the Exchange Act requires any “broker” that makes use of the mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security (other than an exempted security) to register with the Commission.

The text of Section 15(a)(1) – Registration of all persons utilizing exchange facilities to effect transactions  is as follows:

(a)(1) It shall be unlawful for any broker or dealer which is either a person other than a natural person or a natural person not associated with a broker or dealer which is a person other than a natural person (other than such a broker or dealer whose business is exclusively intrastate and who does not make use of any facility of a national securities exchange) to make use of the mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security (other than an exempted security or commercial paper, bankers’ acceptances, or commercial bills) unless such broker or dealer is registered in accordance with subsection (b) of this section.

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.” does not fit within the definition of “broker” based on a plain reading of this section. is not engaged in any securities transaction for the account of others. Any transactions for the purchase or sale of company securities by investors would take place entirely independently of and the website (see assumptions above). does not participate in those transactions, does not negotiate terms of those transactions, does not advise either party to those transactions, does not receive any compensation from or relating to those transactions, and in many cases may not even be aware of those transactions.

The Author

Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys

Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of, the OTC Market’s top source for industry news, and the producer and host of, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.

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