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Why It's Important to Understand Section 15 of the '34 Act

Post on: June 26, 2015 | Fred Bryant | 0

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Over the last six years many very smart people have continued to try and figure out how to work around the registration requirements of Section 15 of the ’34 Act. Many of these people claim that if you are not compensated, directly or indirectly, for securities transactions, that you are not in violation of Section 15 of the ’34 Act.

This position is an incorrect interpretation of Federal Securities Laws. The key reason why I believe this to be the case are the following requirements for registration listed in Section 15 of the ’34 Act:

  • Use of interstate commerce instrumentality
  • To effect any transaction in, or to induce/attempt to induce the purchase or sale of any security

Until recently, significant enforcement actions to support this position did not exist. This week the SEC delivered a cease-and-desist against Florida based Ireeco, LLC and Ireeco Limited, a Hong Kong entity. These entities are under common control and from 2012 until the present have facilitated the matching of potential EB-5 investors (more information on the EB-5 Visa Program here), with regional centers.

Once the U.S. Citizenship and Immigration Services (USCIS) approved an Investor’s petition for a green card, the Ireeco entities were paid a $35,000 flat fee from the regional center that received the referral. From an initial glance I would not construe this to be transaction-based compensation. Although the fee was referenced as a commission, it does not state that it is securities compensation, and there is no reference of it in the violation section of the letter. The fee is triggered by approval from the USCIS (which, although it is a prerequisite to, is not the sale of a security) and it is a flat fee and is not contingent upon the size of an investment. This is something we at WealthForge debate internally and it is a gray area. Coherent cases can be made on both sides.

In this particular case, the SEC did not specifically cite the Ireeco entities, or their controlling persons, with receiving transaction based compensation. Instead, they cited violations of Section 15 of the ’34 Act for willfully violating section 15(a)(1) of the ’34 Act for “using the mails or any means or instrumentality of interstate commerce to engage in the business of effecting transactions in, or inducing or attempting to induce the purchase or sale of, securities for the accounts of others without registering as a broker-dealer with the Commission or without associating with a broker-dealer registered with the Commission.”

Read this as you may, but I take it to mean that since their model was dependent on raising capital, that a broker-dealer would need to be involved. If they had registered with a broker-dealer and that broker-dealer had handled the securities work, this could have all been avoided. Unfortunately for the respondents, this is only the beginning. The SEC is going to bring additional proceedings to determine whether disgorgement and/or civil penalties are appropriate.

With this in mind, is it still worth trying to skirt the law to save some headaches and money? This week Ireeco got a cease-and-desist—who knows who else in the market is already being investigated but doesn’t know it yet?

In my opinion it takes me back to one of my favorite sayings from my days in the Army: “do the right thing, it’s not that hard.”

 

Securities offered through WealthForge, 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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Fred Bryant

Fred founded WealthForge based upon a vision of bringing greater efficiency to private capital markets. A University of Richmond graduate, he also served in the US Army receiving the Bronze Star Medal. Throughout his military tour in Afghanistan, he continued to steer WealthForge forward. Fred provides strategic leadership for the company and holds 6 securities licenses.
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