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50 Times the Headache: State Registration of Issuers and their Agents

Post on: November 18, 2016 | Tim Boykin | 0


As evidenced by the Electoral College system’s effect on our recent presidential election, states continue to hold tremendous power in our society. Their influence in the private capital raising process is no different.

There are two main securities regulation questions an issuer should ask for a private capital raise: (1) are the securities required to be registered; and (2) should the issuer or agents be registered for their activities in participating in the offering?

Everyone seems to focus on the first question. In WealthForge’s case, Rule 506 offerings are generally exempt from federal registration and, relatedly, exempt from registration under “blue sky” laws. Blue sky requirements in this arena have more variation and can cause major problems for issuers engaging in securities sales activity. This post focuses on the second question: the issuer and agent registration requirement

The State Broker-Dealer Registration Requirement

Federal Registration Requirement

We have discussed in several blog posts about the broad requirement to register as a broker-dealer under Section 15(a)(1) of the Exchange Act of 1934. Unless there is an applicable exemption from the requirement, a party facilitating a securities transaction must register as a broker-dealer with the SEC and become a FINRA member. 

A common exemption to the 15(a)(1) requirement is the safe harbor afforded under the SEC regulation commonly called Rule 3(a)4-1, also called the issuer exemption. While the issuer exemption may provide a safe harbor under federal law, state law requirements may require registration even when an issuer meets the issuer exemption requirements.   

Enter the States

Issuers relying on the federal issuer exemption often fail to consider parallel state requirements.  Many states model their securities law after the Uniform Securities Act, which expressly excludes an issuer from the definition of “broker-dealer.”1 Further, under the Uniform Securities Act, employees of issuers are exempt from themselves registering as broker-dealers if they do not receive compensation based on participation in the offering.2 But unfortunately, there are some states that do not follow that stance. 

New York, for example, requires an issuer to register as a “dealer” before it offers securities in the state.New York also has a registration requirement for individuals besides officers or directors “who represent the issuer in the ‘the sale or purchase of securities to or from the public within or from’ the state.”4 Therefore, if other employees are helping to sell an issuer’s securities, they must file a form and pass either the Series 63 or Series 66.

It would take a comprehensive 50-state survey (plus the District and territories) to fully express the broker-dealer and agent exemptions in each state,but New York is not the only state to require registration of securities issuers.

It’s Complicated, Even When You’re in the Clear

Some states, like New Jersey, require an issuer effecting the sale of securities other than through a registered broker-dealer to register at least one person as an agent.6 However, the relevant administrative code section exempts an individual representing an issuer effecting certain federally exempt securities. 7

In Florida (everyone’s favorite swing state), Rule 506 issuers may rely on Rule 69W-500.16, which exempts an issuer and its bona fide employees from registering for Section 4(a)(2) offerings if they have not participated in a securities sale in the last 12 months and “who primarily performs, or is intended to perform at the end of the distribution, substantial duties for, or on behalf of, the issuer other than in connection with transactions in securities.”8 While this may be broad enough for most issuers, employees of serial issuers who raise capital multiple times in a year may not fall under this definition. 

Virtually every state statute requires registration if an employee receives payment from assisting in the securities sale independent of his or her normal salary.  For example, in Ohio an “issuer” is expressly carved out of the definition of a dealer whose activities require registration. The exemption applies to “any officer, director, employee, or trustee of, or member or manager of, or partner in, or any general partner of, any issuer, that sells, offers for sale, or does any act in furtherance of the sale of a security that represents an economic interest in that issuer, provided no commission, fee, or other similar remuneration is paid to or received by the issuer for the sale.”9 Unlike other states, this statute section is not clear on whether, for example, the issuer’s payment of an employee would run afoul of the commission restriction. However, the prohibition on transaction-based compensation is clarified by tracing the administrative code’s reference back to the Ohio statute dealer licensure which references offerings exempt from registration.10

Bottom line, even if you happen to be in the clear with certain states, each state has its own structure and requirements, which can be complicated and can change at the will of the state legislature or administrative agency, or through enforcement action or judicial review without notice.  With regards to online solicitation, some states have indicated that offering communications online does not constitute selling activity requiring registration,11 while some states have not.  Therefore, there is ambiguity on what constitutes sufficient activity in a state to trigger the registration requirement.  A conservative view would be that an issuer making an offering generally available online should, together with its employees and agents, meet the registration requirements of all 50 states. 

Dismiss at Your Own Risk

Each state has its own penalties for breach of the broker-dealer and agent registration requirement.  Perhaps the liability with most teeth comes in the form of an investor that can sue for rescission of the entire offering.  Further, a state’s action against an issuer or its associated person will affect the issuer’s ability to raise capital in the future.  A sanction from the state would likely rise to the level of a bad actor disqualification event under federal regulation, which means those involved would be precluded from participating in a future Reg D offering.  An issuer can mitigate many of these risks by use of competent outside counsel, use of a broker-dealer registered in all 50 states, and maintaining an active awareness of the securities offering process.


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1 Unif. Sec. Act § 102(4)(B) (amended 2005).
Unif. Sec. Act, official comments, § 402 (amended 2005).
N.Y. Gen. Bus. Law § 359-e.
Id. See also Broker-Dealer and Securities Registration Information Sheet, New York State Office of the Attorney General (last updated July 2015), http://www.ag.ny.gov/investor-protection/broker-dealer-and-securities-registration-information-sheet.
5 For an analysis on the similar issuer-dealer requirements of an issuer under Regulation A see Issuer-Dealer and Agent Registration Requirements for Issuers Not Utilizing a Registered Broker-Dealer for Offers and Sales of Securities under Tier 2 of Regulation A, CrowdCheck.com (July 20, 2016), http://www.crowdcheck.com/content/issuer-dealer-and-agent-registration-requirements-issuers-not-utilizing-registered-broker.
See Frequently Asked Questions for Industry, New Jersey Bureau of Securities (last updated Sept. 26, 2016), http://www.njconsumeraffairs.gov/bos/Pages/FAQindustry.aspx.
7 N.J. Admin. Code § 13:47A-3.3(b).
8 Fla. Admin. Code Ann. R. 69W-500.016; Fla. Stat. Ann. § 517.021. See also Division of Securities FAQ, Florida Office of Financial Regulation, http://www.flofr.com/StaticPages/DivisionOfSecuritiesFAQ.htm.
Ohio Rev. Code Ann. § 1707.01(E)(1)(a) (emphasis added). See Securities Frequently Asked Questions, Ohio Department of Commerce, http://www.com.ohio.gov/secu/faq.aspx (“An issuer may sell the securities itself without a licensed dealer provided that no commissions or other remuneration is paid for the sales.”). See, e.g., Robert N. Rapp, Ohio Regulator Speaks out on Unlicensed Compensated Finders, Calfee (May 10, 2013), http://calfee.com/ohio-regulator-speaks-out-on-unlicensed-compensated-finders.
10 See Ohio Admin. Code 1301:6-3-14 (citing Ohio Rev. Code Ann. § 1707.14 (citing Ohio Rev. Code Ann. § 1707.06)). A simpler example is Oklahoma, which more closely models the Uniform Securities Act, where an individual who represents an issuer is exempt from the agent registration requirement for federally covered securities as long as the individual is not compensated “in connection with the agent’s participation by the payment of commissions or other remuneration based, directly or indirectly, on transactions in those securities.” Okla. Stat. Ann. tit. 71, § 1-402(B)(5).
11 See e.g., Va. Code Ann. § 13.1-514(B)(18).

Disclaimer: WealthForge provides this information to our clients and other friends for educational purposes only. It should not be construed or relied upon as legal advice. Private securities offerings may have a long holding period, be illiquid, and contain a high degree of risk. Investors must be able to afford the loss of all of their principal.

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About author

Tim Boykin

Tim focuses on strategic, firm-wide risk management, including cybersecurity and regulatory matters. His goal is to provide excellent customer service, while appropriately limiting liability, for WealthForge’s internal and external clients and stakeholders. Tim earned a bachelor’s degree from the College of William and Mary and received a JD and MBA from the University of Richmond. He holds the CIPP/US certification.
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