SEC Staff Publishes FAQs Regarding the Exemption from Broker-Dealer Registration in Title II of the JOBS Act

February 13, 2013


On February 7, 2013, Staff of the Securities and Exchange Commission (SEC) released ten new Frequently Asked Questions (FAQs) regarding the exemption from broker-dealer registration available under Section 4(b) of the Securities Act of 1933 (Securities Act) (available here). Title II of the JOBS Act added new paragraph (b) to Section 4 of the Securities Act, which provides a limited exemption from the broker-dealer registration requirements contained in Section 15(a)(1) of the Exchange Act of 1934. The following is an overview of the Staff’s responses to the FAQs.

Application of the Exemption in Section 4(b)

Section 4(b) provides that, with respect to securities offered and sold in compliance with Rule 506 of Regulation D of the Securities Act, a person (or entity) who meets specific conditions will not have to register as a broker-dealer solely because: 

  • the person maintains a platform or mechanism that permits the offer, sale, purchase, or negotiation of securities, or that permits general solicitation or general advertising by issuers of such securities, whether online, in person, or through other means; 
  • the person or any associated person co-invests in the securities; or 
  • the person or any associated person provides ancillary services (such as due diligence services) with respect to the securities.

Under the conditions in Section 4(b), a person may rely on the exemption only if (i) the person or any associated person does not receive any compensation in connection with the purchase or sale of such security; (ii) the person or any associated person does not have possession of customer funds or securities in connection with the purchase or sale of such security; and (iii) such person is not subject to a statutory disqualification under the Securities Exchange Act of 1934. A person that satisfies these conditions should keep in mind that Section 4(b) provides only a federal exemption, and does not impact any state broker-dealer registration requirements.

The Exemption in Section 4(b) Is Operational and Does Not Require SEC Rule Making

The exemption in Section 4(b) is operational without SEC rulemaking. However, an issuer or person associated with an issuer may not engage in a Rule 506 offering involving general solicitation or general advertising until the SEC finalizes proposed changes to Rule 506. Further, the exemption in Section 4(b) is only available with respect to offerings made pursuant to Rule 506. Anyone who offers and sells securities outside of Rule 506 may not rely on this exemption.

A “Platform” or “Mechanism” Would Include a Website or Social Media Page

SEC Staff considers both social media and websites to qualify as “platforms” or “mechanisms” that permit offers, sales, and purchases of securities for purposes of Section 4(b). An associated person of an issuer of Rule 506 securities may rely on the Section 4(b) exemption to maintain a “platform or mechanism” as long the person otherwise qualifies for the exemption.

SEC Staff Define “Compensation” Broadly For Purposes of Section 4(b)

The Section 4(b) exemption is not available to anyone who receives (or whose associated persons receive) “compensation in connection with the purchase or sale of such security.” The Staff specifically noted that, for purposes of Section 4(b), compensation is not limited to transaction-based compensation. The Staff interprets the term “compensation” broadly, to include any direct or indirect economic benefit to the person or any of its associated persons. Any salary paid to a person for engaging in the promotion, offering or selling of securities would be considered compensation in connection with the purchase and sale of securities. Accordingly, any person receiving such salary would not be able to rely on the Section 4(b) exemption. As the JOBS Act expressly permits co-investment in the securities offered, the profits associated with such investments would not be considered impermissible compensation for purposes of the Section 4(b) exemption.

Reliance on the Section 4(b) Exemption by Advisers and Private Funds

SEC Staff stated that an entity, such as a venture capital fund or its adviser, that operates a website where it lists offerings of securities by potential portfolio companies (in compliance with Rule 506), co-invests in those securities with other investors, and provides standardized documents for use by issuers and investors, may rely on the Section 4(b) exemption as long as it satisfies the conditions of the exemption, including the prohibition on compensation. The Staff believes that as a practical matter, 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.

You May Still Be A “Broker-Dealer” Even If You Qualify for the Section 4(b) Exemption

Section 4(b) provides for an exemption from registration; it does not provide an exclusion from the definition of the terms “broker” or “dealer”. A separate analysis of the specific facts and circumstances must be conducted in order to determine if a person qualifies as a “broker” or “dealer” under the federal securities laws. A person that qualifies as a “broker” or “dealer” but relies on the Section 4(b) exemption from registration remains subject to certain portions of the federal securities laws, such as those pertaining to (i) fraud, (ii) manipulation, and (iii) insider-trading.

For questions, please contact the attorneys listed above or your O’Melveny & Myers advisor.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Heather Traeger, an O'Melveny partner licensed to practice law in the District of Columbia and Texas, Kris Easter, an O'Melveny counsel licensed to practice law in Texas, and Bjorn Hall, an O'Melveny counsel licensed to practice law in the District of Columbia, contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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