Private Placement Broker Registration - Finally?

I spoke on a panel last Friday at the American Bar Association’s Section of Business Law’s Spring meeting in Dallas (don’t ask about my awesome travel experience on American Airlines). My fellow speakers and I updated the attendees on the new rules for smaller companies, including Rule 144 and Form S-3 changes.

For me a very interesting part of the discussion, though brief, was welcome. Namely, it appears that the vexing “finder” problem in the private placement arena may be improved sooner rather than later. For a number of years an SEC task force has been working with several different SEC divisions to encourage registration with the SEC of folks who act to find privately placed money for both public and private companies. Many, many “investment bankers” help companies raise money but are not registered as broker-dealers with the SEC. Technically, probably most if not all of them should be.

However, the SEC does not have significant resources to go after these violators in the absence of a complaint, which frankly rarely comes. This further encourages these players not to register. It is a little tougher for the finders in dealing with public companies, but in raising money for private companies, there is currently very little incentive to go through the rigorous process of registering, then maintaining a registration, as a broker-dealer.

Prior to 2001, there was a stronger argument for finders to claim an exemption from registration. The SEC no-action letters until then suggested that if an intermediary simply made an introduction of a money source to a company and then stepped away, no registration was necessary even if the intermediary pocketed a fee representing a percentage of the money raised. So long as he did not provide financial advice or help structure or negotiate the transaction, he was OK.

Starting in 2001, however, a group of no-action letters started to suggest that virtually no situation was OK if the intermediary took a percentage of the proceeds. Even if they introduce and step away. This led to some legitimate advisors turning to consulting arrangements paying flat fees regardless of the amount raised, which may or may not have reduced their exposure.

In any event, one of the fairly important challenges for smaller public companies raised by the SEC’s Advisory Committee on Smaller Companies, whose recommendations were issued in April 2006, was that many smaller companies are afraid to work with unregistered intermediaries and the regulatory environment was, at best, unclear. The Committee suggested a modified and simplified form of registration for such players.

It now appears, at long last, that the various necessary SEC divisions which must collectively get comfortable with this seem to be ready to do so in the near term. It is not yet clear, but a much simpler registration process appears to be in the works. It is hoped that these “registered private placement brokers” would not need to maintain net capital like other broker-dealers, might not even have to maintain monthly “focus reports,” etc. It is not yet clear how the state regulators will react, but of course it is hoped that they cooperate and see the benefit of more information being available about these intermediaries, and more certainty for issuers about who they are dealing with and whether they are operating within the law.

If this goes through, the next step would be to do the same for merger & acquisition brokers. Many of the same issues apply.

Keep those fingers crossed!

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