Any individual selling stock for another must comply with the broker laws imposed by the SEC. This is true whether the individual is a family member, friend, director or employee. If the individual selling the stock regularly sells such stock, he must be properly registered as a broker with the SEC. Failure to properly comply with the SEC regulations regarding any sale of stock means that both the individual handling the sale and the company upon whose behalf the stock is being sold will be fully liable for any violations – the complaining party may be awarded full return of their investment plus interest and could pursue additional damages as well.
Determining Who Qualifies as a “Broker” Per The SEC
The SEC has set forth the following factors to determine whether or not an individual selling stock qualifies as a broker:
• Is the individual an employee of the company for which they are selling the stock? There is a presumption that employees are not brokers. It is only a presumption and the remaining factors must be considered to see if the presumption is correct.
• Does the individual spend a substantial period of their time rendering services to the company other than selling securities? Again, employees that provide unrelated services for the majority of their time are less likely to be considered brokers and hence, will not have to register with the SEC.
• Is the individual receiving “fixed” compensation or is their income linked directly to how much securities they sell? Here too, if there is a fixed rate of income for the individual regardless of the amount of securities they sell, they will be less likely to be considered a broker. A person whose income changes on the basis of the volume of securities sold will be considered a broker.
• Will the individual remain with the company after the securities are sold? If the individual’s job terminates upon the completion of the sale then they are clearly employed as a broker and must register. In contrast, an employee who helps sell securities but remains employed by the company long after the completion of the sale is clearly just performing a onetime additional duty to his employer and will not be required to register.
• Has the individual participated in the past in the sale of securities and/or will they be participating in future sales? Again, repeated participation in the sale of securities will result in being classified as a broker and registration will be required.
Under certain conditions, a company can permit its employees to help it raise investment capital without triggering the broker registration requirements (Rule 3a4-1 Safe Harbor “Issuer’s Exemption” for Sales of Securities by Officers, Employees and other Associated Persons of the Issuer). For example, the SEC’s Rules allow an employee, officer or director of a company to participate as a finder in a private offering provided that the employee:
? is not considered by the SEC to be a securities industry “bad boy”;
? does not get paid commissions in connection with the offering;
? is not an associated person of a broker or dealer at the time of his participation;
? performs a job for the company other than in connection with the company’s offering (i.e., marketing or customer relations);
? was not within the last year a registered broker; and
? does not participate in the company’s securities offerings more than once every 12 months (with certain restrictions).
Keep in mind, that each state has its own set of regulations that may differ from federal regulations. For example, in some states only officers and directors of a company are permitted to engage in the sale of securities.
Further, SEC’s Division of Trading and Markets will not recommend that the SEC take enforcement action against “M&A Brokers” if the following ten conditions are met:
1. The M&A Broker must not have the authority to bind the principals in the M&A transaction.
2. The M&A Broker does not provide financing for the transaction.
3. The M&A Broker must never have possession of customer funds or securities.
4. The M&A transactions must not involve a public offering. Any offering or sale of securities will be conducted in compliance with an applicable exemption from registration under the Securities Act of 1933. In addition, no party to the M&A transaction may be a shell company other than a business combination related shell company.
5. If the M&A Broker represents both the buyer and the seller, he or she must obtain written consents from both parties.
6. The M&A Broker may only facilitate a transaction with a group of buyers if the M&A Broker does not assist in the formation of the group of buyers.
7. Following the M&A transaction, the buyer must control and actively operate the acquired company.
8. The M&A Broker may not facilitate a transaction that will result in the transfer of interests to a passive buyer.
9. Any securities received by a buyer or M&A Broker in the transaction will be restricted securities.
10. The M&A Broker (and its officers, directors and employees) has not been barred or suspended from association with a registered broker-dealer.
If the conditions above are satisfied, M&A Brokers are free to take the following actions to facilitate mergers, acquisitions, business sales and business combinations between buyers and sellers of privately-held companies resulting in the transfer of ownership of the acquired company, without regard to the size of the companies and without registering as a broker-dealer under the Exchange Act:
• Receive transaction-based compensation (“success” fee arrangements are permissible);
• Participate in negotiations (without the ability to bind either party to a transaction);
• Advertise the company for sale with information such as the description of the business, general location and price range; and
• Advise the parties to issue securities or otherwise to effect the transfer of the business by means of securities (in lieu of a sale of assets) and to assess the value of any assets and securities sold.
In summation, the SEC will find an individual to be a broker if the individual either appears to be an independent salesperson temporarily calling themselves an employee but who is really in the business of selling securities or the person is a full time employee whose compensation is determined by their success in selling securities.
THIS SHOULD NOT BE DEEMED TO BE LEGAL OR TAX ADVICE BUT IS FOR INFORMATIONAL PURPOSES ONLY. PLEASE CONSULT YOUR LOCAL TAX PROFESSIONAL.