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Brokers and Finders in Securities Law
Article #2 – Who is a Broker? Definition
In this
series of articles, I explain the law of brokers and finders
in selling securities. My intended audience is the business
owner who sells stock (or LLC interests) to raise capital
for the business. The articles deal generally with
securities offerings (that is, private placements of
securities) and specifically with the law of brokers and
finders in the context of a securities offering.
Where You
Are in the Series
Article #1
Overview,
explains why you care about this subject. In brief, if you
sell stock in violation of the broker laws, you give your
investors the ability to sue you and win.
In this
Article #2, I define “broker” and explain how you act as a
broker. In the next articles, I show how the law applies in
the most common scenarios.
The
articles in the series are:
Who is a
Broker?
In general,
a broker is a person engaged in the business of effecting
transactions in securities for the account of others (and in
California, also for your own account). Persons who act as
brokers must register with the SEC and the California Dept.
of Corporations. Be aware that each state has similar
broker laws, and the state’s laws will apply to you if you
sell securities to investors living in the state.
The SEC traditionally uses a four-part test to determine who
is a broker, that is, who is engaged in the business of
selling securities. Under this test, you are a broker if
you:
(1) Actively solicit investors.
(2) Advise investors as to the merits of an investment.
(3) Engage with regularity in securities transactions.
(4) Receive commissions or transaction-based compensation.
Are You a Broker?
Let’s return to the business
owner who sells stock (or LLC interests) to raise capital
for the business. If a major part of your job is selling
stock (that is, finding potential investors, persuading them
to buy your stock and selling them the stock) then you might
very well be acting as a broker (at least under California
law).
Why is this important? Because if you are acting as a broker, you give your
investors a unilateral put right. If the investment goes
bad, the investors can sue you and win, and you must return
to them their purchase price. You cannot let your
activities make you into a broker.
In my next
article, Broker Law for
Employees and Directors Who Sell Your Stock,
I discuss using other people to sell stock, primarily
employees and directors. This is the usual scenario – you
give the selling duties to an employee or perhaps you ask a
director or other related person to find investors. [This
is why start-ups want big names as directors – to help find
investors.] You can be liable to your investors if these
persons violate the broker laws just as if you did it
yourself.
Get a
Securities Lawyer
An offering of securities is complicated. You must
comply with a host of securities laws, of which broker laws
form only a small part. You can comply with the broker
laws that I outline in these articles and still violate some
other securities laws related to your offering. You
need a securities attorney to guide you through. Feel
free to call me if you have any questions or comments.
Call me to schedule a
legal consultation: 510-796-9144 | 