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Unregistered broker-dealer services can be illegal...and costly.

Post on: July 6, 2016 | Tim Boykin | 0

Unregistered broker-dealer services can be illegal...and costly

Last month, in our blog post "Unregistered? You might be breaking the law... and the SEC is watching.," we discussed the importance of the registration requirement of Section 15(a)(1) of the '34 Act. We suggested that Section 15(a)(1) requires registration as a broker-dealer when a person effects or induces the purchase or sale of securities. Recent SEC action suggests that the SEC is construing the registration requirement broadly and is bringing related enforcement actions.

The previous post discussed a specific SEC enforcement action involving an unregistered online platform. This post dives a bit deeper into the recently-decided outcome of that particular action and related circumstances.

On June 21, 2016, the SEC accepted a settlement offer from the respondents in that case. The related order specified the respondents must pay more than $250,000 in disgorgement and prejudgment interest and $160,000 as a civil penalty in addition to being effectively barred from the securities industry.1

The order holds Steven Muehler and his companies, called Blue Coast Securities and Alternative Securities Markets Group Corp. (“ASMG”) breached Section 15(a)(1). They also breached Section 10(b), Rule 10(b)-5, which makes it unlawful to employ manipulative and deceptive devices in connection with the purchase or sale of securities.

The order breaks the illicit conduct into broad categories:

  1. Broker-Dealer Services Offered to Small Business and Additional Broker-Dealer Activity

    Muehler and his companies marketed  securities-related offerings and solicited securities issuers. They also provided broker-dealer services and other “issuer services.” These services included listing the securities for sale, structuring the offering, preparing the offering documents, marketing to and screening investors and accepting investment and funds using an online portal. The respondents also claimed the securities would be available for trading via a vibrant secondary market.

  2. Customer Agreements and Transaction-Based Compensation

    Muehler offered the services for “up-front fees, monthly fees, a percentage of funds raised, and an equity stake in each issuer.” The equity stake increased in some cases based on the success of the offering.

  3. False and Fraudulent Statements, Omissions and Deceitful Conduct

    Muehler made several blatant misrepresentations, including exaggerating his prior success, stating that ASMG was a broker-dealer, and misrepresenting the status of filings and related fees, and misrepresenting the assets of his firms.  He also used a “legal@asmmarketsgroup.com” email address and made false reference to the non-existent ASMG Legal Department.

Lessons to be Learned about the 15(a)(1) Requirement

The order doesn't give clear guidance on what activities or combination of activities ultimately gives rise to the registration requirement under Section 15(a)(1).

In this case there were several factors contributing to the sanctions the SEC accepted. Many of the activities described in the order are patently fraudulent and disingenuous. Further, the order revealed that state regulators previously sanctioned Muehler and his related companies. The respondants also received transaction-based compensation as unregistered entities, which is almost always a Section 15(a)(1) violation.

Still, the SEC specifically called out the unregistered performance of broker-dealer related-services as illegal, independent of the other illegal securities actions in the case. In cases like the one discussed here, it appears the SEC interprets the 15(a)(1) requirement broadly. Industry participants should ensure they are on firm legal footing before engaging in securities-related activity without registration or the assistance of a registered broker-dealer.

 

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1See Steven J. Muehler, Exchange Act Release No. 78118 (June 21, 2016).

Securities offered through WealthForge Securities, LLC. Member FINRA/SIPC. This post is an industry update from WealthForge. The message does not constitute a research report or recommendation and does not take into account the specific investment objectives, financial situation or particular needs of the recipient. This message is not an offer to sell or the solicitation of an offer to buy any security or interest in any fund, which only can be made through a private placement memorandum that contains important information about the risks, fees and expenses of a fund.

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.

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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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