Tag Archives: securities exchange act

David N. Feldman

Lawsuit Seeks Exemption from Broker Registration for Private Placement Finders

A few months ago, a real estate company brought an action against the Securities and Exchange Commission, and apparently the SEC now has been served in the case, known as Platform Real Estate, Inc. vs. United States Securities and Exchange Commission. The federal case was filed in the Southern District of NY. The suit seeks a “declaratory judgment,” or a court’s interpretation of the law as it applies to a particular situation. The plaintiff is asking the court to declare that traditional finders in private securities offerings should not have to be registered as broker-dealers with the SEC. The SEC’s position on the matter, set out in a series of “no-action” letters back in 2001, provides only very limited circumstances where private placement finders would not have to be registered. Prior to that, finders that merely introduced investors to a company and did not engage in negotiations or provide financial advice could earn commissions without registration.

Why does this matter? Many smaller companies, both public and private, struggle to raise money. Traditional investment banks often eschew involvement with smaller companies since the amounts raised are smaller, making their fees smaller. Thus, many of these companies turn to unregistered finders, often individuals who are expert at raising smaller amounts for earlier stage companies. The cost of registering as a broker, maintaining that registration and satisfying net capital requirements is prohibitive for a number of these finders given the size of deals they tend to work on.

Platform’s argument is that the SEC’s position is legally wrong. They point to language in Section 15(a) of the Securities Exchange Act and argue that the language limits the requirement to register to those using securities exchanges or over-the-counter platforms to effect securities transactions. Finders generally do not effect trades through exchanges or OTC platforms. In 2014, the SEC did provide no-action relief for brokers of mergers and acquisitions involving private companies to avoid registration in many circumstances. We will monitor this case for further developments.