New FAQs on Broker-Dealer Registration Exemption

On February 5, 2013, the SEC released FAQs regarding Section 201 of the JOBS Act, which offers a new limited exemption from broker-dealer registration.

In addition to directing the SEC to adopt rules lifting the ban on general solicitation in Rule 506 offerings to only accredited investors (provided that the issuers take reasonable steps to verify accredited investor status), Section 201(c) of the JOBS Act also made a statutory change to Section 4 of the Securities Act.  New Section 4(b) provides that a person need not register as a broker-dealer solely by reason of actions to facilitate Rule 506 offerings.  The intent is to allow third parties to operate funding portals or another platform or mechanism in order to facilitate the sale of securities in Rule 506 offerings that utlize general solicitation without becoming subject to broker-dealer registration.   While the lift of the ban on general solicitation in certain Rule 506 offerings depends upon SEC rulemaking (the SEC proposed rules in August of 2012, and there has been no action since), this new exemption from broker-dealer registration was effective immediately as a statutory change.

There are a couple of requirements that must be met in order for a person to take advantage of the exemption from broker-dealer registration provided by Section 4(b).  First, Section 4(b) is only an exemption from registration based solely on certain specified activities, which (broadly speaking) consist of operating a “platform or mechanism” to facilitate the sale of securities, co-investing with an issuer, or providing “ancillary services” such as due diligence services without investment advice or standard documentation without negotiation.

Read more at dodd-frank.com

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