April 18, 2014

SEC Issues Frequently Asked Questions on Exemption from Broker-Dealer Registration Under the Jumpstart Our Business Startups "JOBS" Act

The Securities and Exchange Commission’s Division of Trading and Markets has issued Frequently Asked Questions (FAQs) that provide guidance on the exemption from broker-dealer registration in Section 201(c) of the Jumpstart Our Business Startups Act. Section 201(c) of the JOBS Act adds Section 4(b) to the Securities Act of 1933 (Securities Act) to provide that persons participating in an offering under Rule 506 of the Securities Act are not subject to broker-dealer registration solely because (i) that person maintains a platform or mechanism that permits the offer, sale, purchase, negotiation, general solicitation or advertisements or similar or related activities by issuers of such securities; (ii) that person or any person associated with that person co-invests in such securities; or (iii) that person or any person associated with that person provides ancillary services with respect to such securities. In addition, that person and each person associated with that person may not (i) receive compensation in connection with the purchase or sale of such security, (ii) have possession of customer funds or securities in connection with the purchase or sale of such security, and (iii) be subject to a statutory disqualification as defined under Section 3(a)(39) of the Securities Act.

In the FAQs, the SEC clarified that the exemption from broker-dealer registration in Section 4(b) of the Securities Act (Section 4(b) Exemption) is fully operational and does not require the SEC to issue or adopt any rules. The Section 4(b) Exemption is only available to those persons who do not receive any compensation in connection with the purchase or sale of securities. This restriction is not limited to transaction-based compensation. The SEC advised that it interprets the term “compensation” broadly to include any direct or indirect economic benefit to such persons. However, the SEC provided that profits with respect to co-investment in the securities offered on the platform or mechanism would not be considered impermissible compensation for purposes of the Section 4(b) Exemption. The SEC also advised that, assuming all conditions are met, the Section 4(b) Exemption does not limit the types of persons who are permitted to maintain a platform or mechanism for an issuer’s securities. Accordingly, associated persons of issuers that otherwise qualify for the Section 4(b) Exemption may rely on it to be exempt from broker-dealer registration; however, the employees of an internal marketing department or the investor relations department of an affiliated adviser of a complex of privately offered funds may not rely on the Section 4(b) Exemption if such employees are paid salaries to promote, offer and sell shares of the privately offered funds.

Click here to read the SEC’s Division of Trading and Markets Frequently Asked Questions.

©2014 Katten Muchin Rosenman LLP

About the Author

James D. Van De Graaff, Katten Muchin Law Firm, Financial Institutions Attorney

James D. Van De Graaff primarily represents broker-dealers, investment banks and market-making firms in the regulatory aspects of their business. He has more than 20 years of experience representing financial services clients in compliance reviews and training, mergers and acquisitions and responding to inquiries or investigations involving the US Securities and Exchange Commission (SEC) and securities self-regulatory organizations.


About the Author

Avi Badash, Katten Muchin Law firm, finance attorney

Avi Badash concentrates his practice in financial services matters.

Prior to joining the firm, Avi was an Associate Director at the Financial Industry Regulatory Authority (FINRA), where he was involved in securities arbitration matters among broker-dealers and between broker-dealers and their customers or registered representatives.

While in law school, Avi was a member of the Cardozo Securities Arbitration Clinic.


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