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The Importance of a Broker-Dealer

Post on: October 28, 2014 | Kevin Walsh | 1



Much attention has recently been given to the JOBS Act and its impact on the ability of companies to raise capital through private placements. The JOBS Act, formally known as the Jumpstart Our Business Startups Act of 2012, was enacted partly to facilitate capital raises for smaller companies by easing the regulatory burdens imposed by federal securities laws. Previously, most companies were prohibited from engaging in “general solicitation” during offerings, meaning that companies could not publicly advertise that they were raising capital, without first registering with the SEC. The expense of SEC registration was cost-prohibitive for many emerging growth companies. Through the JOBS Act, private companies may now generally solicit and advertise publicly, subject to certain conditions.

Discussion around the JOBS Act has so far largely focused on its application to reward-based or donation-based crowd-funding models. This type of crowdfunding is often associated with platforms like Kickstarter, which allows individuals to contribute funds to particular projects, either as donations or in exchange for certain products or prizes. However, Kickstarter and similar platforms do not allow companies to issue equity interests to investors, and so their funding models are generally outside of the SEC’s regulatory oversight. The type of crowdfunding that Kickstarter might ultimately facilitate – in which companies raise funds from many investors, without regard to investor accreditation, who each make a small investment – is still illegal under the current law, pending release of final rules by the SEC.

However, the implications of the JOBS Act and the allowance of general solicitation by smaller companies promise to be more dramatic in private placements to accredited investors.

Creating Your Online Fundraising Platform

With smaller companies now permitted to have unprecedented access to potential investors, many companies are working with intermediaries, including certain broker-dealers, to create their own online fundraising platform to facilitate their capital raises. By creating an online platform, companies receive exceptional exposure to potential investors. Platforms also allow companies to monitor investor engagement, giving them valuable information on investor interest throughout the offering.

Online fundraising platforms also benefit investors. By allowing companies to securely provide potential investors with investment documents and other company information, platforms can offer increased transparency and allow for more robust due diligence. A well-designed platform also offers investors convenience and can facilitate communication and document distribution between companies and investors.

Finding the Right Broker-Dealer

The right broker-dealer can have a significant impact on the success of a company’s offering. Broker-dealers can assist companies with structuring offerings, determining appropriate valuations and consummating investment closings. With general solicitation offerings in particular, Broker-dealers work with the company and the company’s counsel to avoid the regulatory pitfalls imposed by the SEC in connection with the JOBS Act. While the JOBS Act did loosen certain regulatory restrictions on companies in private placements, all investors in a general solicitation offering must be accredited investors under federal securities law, and unlike traditional private placements, a company may not simply rely on investors’ self-certifications that they are accredited. Rather, under new regulations promulgated by the SEC in connection with the JOBS Act, a company must take reasonable steps to confirm that investors are accredited.

These new regulations do not require specific verification procedures, and the SEC has stated that what constituted “reasonable steps” depends on the facts and circumstances of each investor and the offering. However, the SEC has specified certain non-exclusive verification methods of which a broker-dealer and company counsel can help the company take advantage, such as obtaining supporting documents like tax forms and brokerage statements from potential investors. A seasoned broker-dealer will be familiar with these requirements and can guide the company through the verification process. This may be ideal for many companies that, for privacy reasons or otherwise, aren’t comfortable with requesting bank statements from potential investors. And because failure to reasonably confirm investor accreditation disqualifies a company from making a general solicitation offering, even if all investors in the offering are accredited, it is imperative that companies strictly comply with these requirements.

The right broker-dealer is also well positioned to help companies take full advantage of a general solicitation offering. Many smaller companies lack the robust networks of wealthy individuals that can provide the necessary capital to bring a company to the next stage. With access to large networks of accredited investors, broker-dealers can bring together companies and potential investors, and can even match them based on the type of issuer and the nature of the offering.

Broker-dealers can also serve as a trusted and neutral third-party to facilitate transactions between the company and investors. The involvement of a broker-dealer behind an offering gives more credibility to the company and its offering, since investors know that broker-dealer has conducted due diligence before commencing general solicitation. Some broker-dealers may also host their own online fundraising platform for use by their clients.

Your Next Capital Raise

The ability to raise capital through general solicitation brought about by the JOBS Act gives smaller companies extraordinary access to potential investors, and when executed using the functionality of an online fundraising platform, your next capital raise could open up vast areas of the market that were previously untouchable. The regulations around general solicitation continue to develop, and their full impact has yet to be seen. When you are ready to commence your next capital raise, consult with an attorney and a broker-dealer to help navigate the process.

* This article is for information purposes only and does not constitute legal advice.

Kevin Walsh is an attorney with the law firm Royer Cooper Cohen Braunfeld LLC. He can be contacted at kwalsh@rccblaw.com.

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.

Disclaimer: Altigo provides this information for educational purposes only. It should not be construed or relied upon as legal or tax advice.

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