FAQ on (Pretty Much Useless) Exemption from Broker-Dealer Registration in JOBS Act (with Lofchie Comment, Particularly as to Funds)

The SEC Division of Trading and Markets has provided guidance on the exemption from broker-dealer registration in Title II of the JOBS Act. The SEC is also soliciting public comments on regulatory initiatives under the JOBS Act.

Responses to Frequently Asked Questions:

• Question 1.Can I rely on the exemption from broker-dealer registration in Securities Act Section 4(b) [the exemption from the definition of "broker-dealer" for the provision of an online trading platform without compensation] before the SEC adopts rules to eliminate the ban in Rule 506 on general solicitation?
• Answer.Yes. The exemption from broker-dealer registration in Section 4(b) does not require the SEC to issue or adopt any rules. You cannot permit an issuer to conduct a general solicitation of a Rule 506 offering on your platform, however, until the SEC's rules permitting those activities for a Rule 506 offering are adopted.
• Question 2.Broker-dealers are required to register under the Securities Exchange Act of 1934 ("Exchange Act"), but Securities Act Section 4(b) provides an exemption from the broker-dealer registration requirements in the Securities Act. Does that mean the exemption from broker-dealer registration in Section 4(b) is not operational?
• Answer.No. Congress exempted persons described in Section 4(b) from the broker-dealer registration requirements under Section 15(a)(1) of the Exchange Act. The staff views the exemption to be fully operational.
• Question 3.Is the exemption in Section 4(b) available to a platform that offers and sells securities other than those offered and sold under Rule 506 of Regulation D?
• Answer.No. The exemption from broker-dealer registration in Securities Act Section 4(b) only applies when securities are offered and sold under Rule 506 of Regulation D.
• Question 4.Section 4(b)(1)(A) allows a person to "maintain a platform or mechanism that permits the offer, sale, purchase, or negotiation of or with respect to securities, or permits general solicitation, general advertisements, or similar or related activities by issuers of such securities, whether online, in person, or through other means." Would an Internet website or social media qualify as a "platform or mechanism"?
• Answer.Yes. We believe that Congress specifically intended to capture social media and Internet websites when it enacted Section 4(b)(1)(A).
• Question 5.The exemption in Securities Act Section 4(b) is not available to anyone who receives (or whose associated persons receive) "compensation in connection with the purchase or sale of such security." What forms of compensation would cause me to be unable to rely on the exemption?
• Answer.Congress conditioned the exemption on a person and its associated persons not receiving any "compensation" in connection with the purchase or sale of such security." Congress did not limit the condition to transaction-based compensation. The staff interprets the term "compensation" broadly to include any direct or indirect economic benefit to the person or any of its associated persons. At the same time, we recognize that Congress expressly permitted co-investment in the securities offered on the platform or mechanism. We do not believe that profits associated with these investments would be impermissible compensation for purposes of Securities Act Section 4(b).
• Question 6.May an entity, such as a venture capital fund or its adviser, operate an Internet website where it lists offerings of securities by potential portfolio companies (in compliance with Rule 506), co-invest in those securities with other investors, and provide standardized documents for use by issuers and investors, rely on Securities Act Section 4(b) to not register as a broker-dealer?
• Answer.Yes. These activities are permitted under Section 4(b), subject to the conditions set forth in Section 4(b)(2), including the prohibition on receiving compensation in connection with the purchase or sale of securities. As a practical matter, we believe that the prohibition on compensation makes it unlikely that a person outside the venture capital area would be able to rely on the exemption from broker-dealer registration.
• Question 7.Could an associated person of an issuer of Rule 506 securities rely on the exemption under Section 4(b) to maintain a "platform or mechanism" for the issuer's securities?
• Answer.Yes. Assuming the associated person otherwise qualifies for the exemption, including the condition prohibiting the receipt of any compensation in connection with the purchase or sale of securities, Section 4(b) does not limit the types of persons who are permitted to maintain a platform or mechanism.
• Question 8.In some instances, a complex of privately offered funds may have an internal marketing department or use the investor relations department of an affiliated adviser or other entity whose staff is paid a salary to promote, offer, and sell shares of the privately offered funds. Can these persons rely on the exemption from broker-dealer registration in Section 4(b) if the funds are offered and sold pursuant to Rule 506?
• Answer.No. Any salary paid to a person for engaging in these activities is compensation to that person in connection with the purchase or sale of securities. As a result, that person would not be able to rely on the exemption from registration as a broker-dealer provided in Section 4(b).The Commission has previously noted that persons who market interests in a private fund may be subject to the registration requirements of Section 15(a)(1) under the Exchange Act.
• Question 9.Does the exemption from the requirement to register as a broker-dealer mean that the persons engaging in the activities described in Section 4(b)(1) are not brokers or dealers?
• Answer.No. Section 4(b) provides an exemption from registration, not an exclusion from the definition of the term "broker" or "dealer." Whether someone is a broker or dealer requires a separate analysis based on the particular facts and circumstances presented. The Guide to Broker-Dealer Registration provides staff guidance on the types of activities that may bring a person within the meaning of the term "broker" or "dealer". Although an exemption from registration means that a person would not have to comply with obligations incumbent on a registered broker or dealer, some portions of the federal securities laws apply to brokers or dealers regardless of registration.
• Question 10.Does the exemption in Section 4(b) also provide an exemption from state registration requirements?
• Answer.No. Title II does not exempt the persons described in Section 4(b) from any state registration requirements.

Lofchie Comment: Congress never explained why it provided the Securities Act Section 4(b) exemption from registration as a broker under the Exchange Act. As the above FAQ indicates, the exemption is, in fact, extremely narrow since, according to the FAQ, the person relying on the exemption is not permitted to receive any compensation for furnishing the relevant brokerage services - not even, according to the FAQ, an "indirect economic benefit." But why would anyone provide Section 4(b) brokerage services if the person would not receive any benefit whatsoever? I also note that the definition of "broker" in Section 3(a)(4) of the Securities Exchange Act only applies to a person who is "in the business" of providing brokerage services. Generally, a person who does not receive any compensation is not in "business" and thus is not a "broker," and thus would not have to rely on the Section 4(b) exemption. In short, as far as I can tell, the Section 4(b) exemption for brokers is of little value, which I might complain more about if I understood the exemption's purpose. The interesting point, as far as private funds are concerned, is the answer to Question 8, which says that the exemption is useless to them (though no more useless to them than it is to pretty much everyone else).

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