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Why Do I Need to Work with a Broker-Dealer?

Post on: June 14, 2018 | Chris Rohde | 3


As an issuer, you may be thinking why would I want or need another person involved in my offering? You already have your team, likely an attorney, and maybe some accountants working on the  offering—why would you need to pay a broker on top of that? Because having a broker-dealer involved when raising capital is both good for you and good for your investors.

Why working with a broker is good for you

Most issuers wouldn’t consider creating their offering documents without the guidance of qualified legal counsel. Yet many proceed to undertake the sale of securities to investors without the guidance of a registered broker-dealer. This can be a costly mistake. Working with a broker-dealer, like WealthForge Securities, allows you and your securities counsel to benefit from securities-specific expertise.  A broker-dealer provides this by giving market feedback on the structure, managing the day-to-day offering logistics, and providing compliance services.

When you engage a broker-dealer to assist with an offering, you gain access to that broker-dealer's knowledge about the marketplace, which can be used to improve your offering. A broker-dealer specializing in Regulation D and Regulation A, for example, has reviewed the structure and documents of literally hundreds of offerings. As a result, a broker-dealer will tell you that a certain structure is less likely to attract investors or that a section of the offering materials is confusing. This type of advice comes from the broker's experience in conducting securities transactions. Additionally, you can rest easy knowing that a broker-dealer has reviewed the entire offering and deemed it to be in compliance with SEC or FINRA rules.

Engaging a broker-dealer can also aid you in the process of conducting the offering. For example, many broker-dealers can handle the flow of funds, either through holding the funds themselves or with an outside third-party bank – a step which is required if the offering has a minimum contingency. Along with managing the flow of funds, a broker-dealer will conduct diligence to ensure that the funds are not involved in criminal activity or money-laundering. This protects you from bad investors or circumstances in which they receive money that is subsequently locked up by the U.S. government. In addition, a broker-dealer likely has a more efficient process, system, or technology to facilitate the required back-office reviews of investors, such as accreditation verification, Know Your Customer (KYC) requirements, and Customer Identification Program (CIP) requirements. 

An issuer cannot sell a security the same way it sells its products or services. Securities sales are governed by a host of regulations, from the SEC to your local state, and one misstep can cost you a fine, your offering, and even the possibility of future offerings. While a good securities attorney is a huge asset in avoiding many of these potential pitfalls, having a broker-dealer managing the offering provides an additional review for potential issues with both federal and state securities laws. As part of conducting diligence on an offering, a broker-dealer will review the offering materials to ensure that the materials are not fraudulent or misleading. In particular, a broker looks at the claims made to ensure that they reasonable and based on facts, ensuring they are in compliance with FINRA's standards.

Conducting a securities transaction can be a very complicated undertaking, but a broker-dealer with expertise in the industry is a good investment towards a successful offering.

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Why working with a broker is good for your investors

Sophisticated investors want to be confident that an offering they are considering for investment is worthy. One indicator that investors pay attention to is evidence of an independent, third-party broker-dealer who has performed due diligence on the offering. In order to sign-off on an offering, a broker-dealer must evaluate the issuer, the offering, and conduct an objective suitability review to determine whether the offering is sound. Investors take comfort in the knowledge that such a review has been conducted by a licensed broker-dealer.

Working with a broker-dealer also protects your investors by providing a higher quality of communication. FINRA, the regulator for broker-dealers, requires communications distributed by broker-dealers to meet a higher standard than the SEC’s fraud standard. What this means in practice is that any communication distributed by a broker-dealer cannot include hyperbolic language, projections of returns, or any other language prohibited by Rule 2210, FINRA’s advertising rule. So why would you willingly enter into a relationship that will require you to limit what you can say in soliciting investments? The higher communication standard that comes with working with a broker-dealer benefits your investors by providing them with the information they need to fairly evaluate the offering, but it also benefits you by protecting you from legal claims.

Conducting your offering through a broker-dealer may also make the investment process more efficient for you and your investors. Traditionally, sales of private and non-registered securities occur via paper documents distributed via mail, or sometimes email, for circulation. This process remains highly inefficient, but the world of private and non-registered securities is changing. More and more, broker-dealers are conducting these transactions online, which allows documents to be circulated more quickly and the investment to occur more efficiently. Additionally, when a broker-dealer is involved in reviewing the diligence materials, the end result is generally a clearer presentation of the information investors need to make their investment decision. This hopefully leads to a more efficient review by the investor, leading to a timelier investment decision.

A broker-dealer, such as WealthForge Securities, is a valuable asset to issuers attempting to raise capital. Both the issuer and its potential investors benefit from a broker-dealer’s involvement in an offering. Particularly, the issuer benefits from the broker’s third-party review of the offering’s structure, the broker’s management of the mechanics of the offering, and the broker’s experience in avoiding potential regulatory and legal pitfalls. Additionally, the investor benefits by knowing that an independent, regulated entity reviewed the offering and by the efficiencies gained through the broker’s management of the offering. 


Download Our E-Book, Working with a Broker-Dealer

If this is your first time working with a broker-dealer, you may wonder what to expect.
This E-book will help prepare you to take full advantage of the benefits that a broker-dealer provides.


About author

Chris Rohde

Chris serves as Associate Corporate Counsel at WealthForge where he advises on an array of areas, including both federal and state securities laws, broker-dealer law, general corporate law matters, and cybersecurity.
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