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Legal Issues

SEC No-Action Letter Further Limits Activities of Unregistered Broker-Dealers - June 8, 2010

In a letter dated May 17, 2010, the staff of the Securities and Exchange Commission ("SEC") declined to provide the no-action relief requested by a law firm that proposed to assist one of its clients (the "Company") in raising capital without registering with the SEC as a broker-dealer.  In its letter to the SEC, the Brumberg, Mackey & Wall, P.L.C. law firm ("BMW") requested the SEC staff to advise that it would not recommend enforcement action if BMW introduced potential investors to the Company and, upon the closing of any successful debt or equity investments made as a result of these introductions, the Company compensated BMW by paying a "referral fee" based on a percentage of the amounts raised.

In its letter to the SEC, BMW acknowledged past SEC guidance indicating that receiving transaction-based compensation in connection with attempting to induce the purchase or sale of securities was one of the hallmarks of broker-dealer activity.  BMW attempted to distinguish its proposed referral fee arrangement, however, by stating that its role would be limited to introducing the Company to a limited number of potential investors who "may have an interest" in making an investment in the Company.  BMW also stated that it would not, among other things, (i) engage in any negotiations between the Company and the potential investors, (ii) provide any information about the Company to potential investors which may be used as the basis for negotiations between the Company and the investors or (iii) provide any assistance to either the Company or the investors with respect to potential investment transactions.

The SEC staff's response to BMW stated that any person receiving transaction-based compensation in connection with another's purchase or sale of securities generally must register as a broker-dealer or be an "associated person" of a registered broker-dealer.  The staff also stated that it believed that BMW's proposed introduction activities would involve "pre-screening" potential investors to determine their eligibility to invest in the Company and "pre-selling" the Company's securities to gauge investors' interest.  Further, the staff stated that the proposed compensation arrangement, in which the Company would pay BMW a fee tied directly to successful investments, would give BMW a "salesman's stake" in the proposed transactions such that BMW's proposed activities would require BMW to register as a broker-dealer.

The SEC's letter denying BMW's no-action request is the latest in a line of no-action letters that restrict the ability of "finders" to assist companies in raising capital without triggering broker-dealer registration requirements.  The full text of the BMW letter, and the SEC's response, can be found at the following here.  

In light of this recent SEC guidance, persons seeking to act as "finders" should carefully consider their role in, and the structure of, any transactions. 


Please contact Robert W. Dixon at 515.288.2500 or for more information.