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Why You Need a Broker Dealer: A Securit(ies) Blanket for the Investment World

Post on: July 17, 2017 | Josh Galante | 1


With an increase in volume in alternative investments, such as Regulation D and even Regulation A offerings, the private investment market is trending upwards. However, in the investment world, there are people that attempt to get around the rules and defraud or manipulate investors. While the market has its highs and lows, there remains one constant safety net for investors and companies alike: the presence and use of a broker-dealer.

Take this example. in 2016, two men raised $6 million from more than 100 investors. This alone is not an issue. However, it was alleged that the men owned and controlled a company that held warrants to purchase the common stock from a start-up technology company, and in order to generate buzz for the warrants, the pair began showcasing the warrants as exclusive and able to be exercised for a profit. One of them would lure investors into buying these warrants by throwing extravagant parties at his multimillion dollar estate and boasting about his “track record” of bringing startup companies public and yielding high returns for investors. Separately, the other raised $675,000 from individuals that entrusted him to invest in securities on their behalf. Neither man was registered with the SEC or any state regulator to raise such money from investors.

While investors thought their money was being put to good use, the men allegedly used the money they received to pay for a mortgage, credit cards bills, a car lease, and college tuition, not to mention luxurious trips to Las Vegas. Between September 16, 2016 and June 13, 2017, the SEC entered civil judgments against the men for, among other things, violating multiple anti-fraud provisions and failing to register as brokers with the SEC.

This example—just one of many—highlights just some of the potential pitfalls that can be avoided for both investors and companies by engaging with an SEC registered broker-dealer. The broker-dealer supervises registered individuals that sell for them and those individuals must follow regulatory guidelines during their sales activity. Use of a broker-dealer protects companies by ensuring that their securities pass the requirements that the SEC, FINRA, or any other agency may implement when it comes to the offer and sale of securities, both public and alternative. The burden (and some of the liability) of complying with these requirements is passed on to the broker-dealer, protecting the company. As for the investor, engaging in securities that have been processed by a broker-dealer may protect them from appealing, but fraudulent, opportunities. It should be mentioned that the use of a broker-dealer does not make an offering have a better potential for success or more profits, but it at least gives investors a chance, rather than having their money stolen for uses like vacations and personal expenses.


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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

Josh Galante

Josh Galante is a rising third year law student at the University of Richmond's School of Law. As part of the legal team, he focuses on contract drafting and review, intellectual property, corporate governance and other thought leadership and research projects at WealthForge.
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