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Brokers and Finders in Securities Law
Article #3 – Broker Law for Employees and Directors Who
Sell Your Stock
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 the
prior Article #2 Who is
a Broker? – Definition,
I define brokers and I explain how broker law applies to
you, the business owner, when you sell stock in your
business. In this Article #3, I explain how broker law
applies to your employees and directors when they sell your
stock.
The
articles in the series are:
Employees
and Directors Must Comply with Broker Law
Assuming that you are busy or that your circle of friends
and family is limited, you might ask other people to help
sell your stock. You might ask your employees, directors or
friends to help and in this way gain access to new circles
of investors. The next issue is whether your employees,
directors, friends etc. are brokers when they help you sell
stock.
Anyone who sells your
stock must comply with the broker laws. This is true for
your employees, officers, directors, friends and everyone
else. They must register as brokers if they routinely
engage in the business of effecting securities
transactions. Employees and other related persons who
primarily assist in selling securities may violate the
broker laws, especially if they are paid for selling the
securities and have few other duties. Your company can be
liable to the investors if these persons violate the broker
laws just as if you did it yourself.
Why is this important? Because if anyone selling stock on your behalf
violates the broker laws, then both your company and the
selling person can be liable to the investors. Standard
damages are the return of the investor’s purchase price for
stock.
SEC Factors for Determining Who is a Broker
The
SEC has identified the following factors for whether a
selling person is a broker:
- Is the person an employee? Employees are less likely to
be required to register as a broker.
- Is the person’s compensation linked to the amount of
securities sold, or is it a fixed compensation? Persons
receiving fixed compensation are less likely to be required
to register as a broker.
- Does the person devote a substantial portion of his time
to rendering services for your company that are not related
to the sale of securities? Employees providing unrelated
services are less likely to be required to register as a
broker.
-
Does the
person intend to remain with
your company after completion of the securities offering?
Persons intending to remain are less likely to be required
to register as a broker.
- Has the
person participated in the past, or will the person
participate in the future in other securities offerings by
your company or other companies? Persons participating in
other offerings are more likely to be required to register
as a broker.
Basically, the SEC looks to whether the person is (1) an
independent salesperson temporarily calling himself an
employee, but who really is in the business of effecting
securities transactions, or (2) a fulltime employee who,
because his selling efforts are of such magnitude or because
his compensation is so related to his success in sales, will
be considered to be in the business of effecting securities
transactions.
Summary of How the Broker Laws Apply to Employees and Other
Persons
For employees, you argue
that they are not “engaged in the business of selling
securities” hence are not brokers. Be sure that the
employees do not routinely sell stock. Pay special
attention to employees of a management company or general
partner who sell stock in multiple operating or fund
companies. Also pay attention to employees who receive
extra compensation for selling stock or spend most of their
time selling stock. Lastly, look into the background of the
selling employees to discover if they have violated
securities laws in the past, or are in any way associated
with a registered securities broker.
For non-employees who sell stock in your
company (e.g. directors, advisors etc.), again you must be
sure they are not “engaged in the business of selling
securities.” This is a facts-and-circumstances analysis
based on the seller’s (lack of) volume of securities
transactions and (lack of) intent to engage in a volume of
securities transactions. Keep in mind that it’s the
seller’s overall transactions that count, whether on your
behalf or for other companies. Pay special attention to how
you compensate the directors for their selling efforts – if
you pay them like a broker they might be brokers.
Please see my next article, Finders for more information on how your directors
and other non-employees can sell stock in your company
without violating applicable broker laws.
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 | 