Thursday, October 2, 2014

Let's Make a Deal: Regulating Deal-Makers on Wall Street, Main Street and in Silicon Valley in the Crowdfunding Era (Summary of 14 Articles)

By Jim Verdonik
I'm an attorney with Ward and Smith PA.  I also write a column about business and law for American Business Journals , have authored multiple books and teach an eLearning course for entrepreneurs.

You can reach me at
Or you can check out my eLearning course at
or read my newspaper articles at

This article provides a quick summary of 14 articles I recently wrote about securities laws that regulate Deal-Makers:
·         Venture Capital Managers
·         Investment Bankers
·         Business Brokers and Other M & A specialists
·         Finders
·         Real Estate Developers
·         And the newest members of the dealer-makers club: people who operate technology platforms that showcase companies that are raising money and Social Media consultants who attract potential investors to offerings.

The articles focus on the ongoing struggle between Wall Street, Silicon Valley and Main Street to control different parts of the deal-making world and why the SEC is favoring Wall Street at the expense of both Main Street and Silicon Valley Deal-Makers.  This raises the question: When is "investor protection" simply a tool for protecting Wall Street from competition?
In this struggle for Deal-Making domination, the specific services you provide and the types of fees you charge matter.  Small changes in your business model can affect what you are allowed to do.
We'll focus on SEC positions that make it more difficult for small to medium size businesses to raise capital and what steps Deal-Makers should take to capitalize on regulatory and technology change to better serve this market.  In this process, we'll analyze:
  • The traditional regulatory framework for brokers in private placements, including recent SEC efforts to expand the list of people who have to register as brokers.
  • Court cases that define how unregistered finders should operate to position themselves to win against the SEC.  What services can unregistered finders safely provide?  What fees can unregistered finders safely charge?
  • The exemption Section 201 (c) of the JOBS Act created for unregistered intermediaries in Rule 506 offerings and how the SEC's interpretation of the limited scope of this exemption is depriving investors of important tools investors need.
  • How to make a living in the "crowd."  The economics of crowdfunding portal operators dictated by SEC rules.  What services can portal operators provide?  What fees can portal operators charge?  How will the crowdfunding rules adversely affect both companies raising capital and investors who want to use crowdfunding portals?
  • Proposals to provide exemptions that will free unregistered finders to play more active roles in private placement transactions.
  • How to comply with a new M & A brokers exemption from registration for business brokers and others who help sell entire businesses.
  • The rise of online venture capital in the form of single purpose venture capital investment and buy-out funds as deal-makers switch from being agents to principals and how the Investment Advisers Act (which for decades has had limited impact) is becoming more important to Deal-Makers.  Why raise one fund that invests in ten companies when you can set up ten funds to invest in ten companies, especially now that technology can speed the capital raising process?
  • The role Social Media consultants play on the capital raising team.
  • A reminder that state laws still regulate brokers and investment advisers.
All these issues are related; because they all affect Deal-Makers, but not all issues affect all Deal-Makers.
To help you focus on the issues that are most important to you and your business, we've created a table that briefly describes each article.  Click on the links in the table to find the full articles.

Article Number
This article discusses public policy issues related to Deal-Makers.  We describe how the SEC's policy of applying broker-dealer rules too broadly, limits competition, harms the economy, preserves Too Big to Fail Investment Banks, deprives growth companies of capital and limits the choices investors have.
Who Are You Calling "Broker"? Why the SEC Casts Too Broad a Net.
This article describes the SEC's position about who is required to register as a broker.  We discuss the three key issues the Securities Exchange Act says must be present before you have to register as a broker and how the SEC often ignores the statute.
Courts vs SEC:  Why Do Some Courts Disagree with the SEC's Broad Rules About Who Has to Register as a Broker?
This article describes the principles courts have used to decide that the SEC's interpretation of the broker registration requirements of the Securities Exchange Act is too broad and how unregistered finders should conduct their business to fall within the court decisions that favor unregistered finders.
Section 201 (c) of the JOBS Act: New Exemption from Broker Registration in Rule 506 Offerings and SEC's Narrow Interpretation of Exemption
This article describes the exemptions from registration as a broker the JOBS Act created in 2012 for all Rule 506 private placement offerings and why the SEC opposes this exemption and limits the fees you can charge for services.  The JOBS Act exemption applies to both operators of digital platforms that connect issuers and potential investors and some activities of unregistered finders in traditional offerings that don't use the Internet.  Exempted services include due diligence services and providing standard investment forms and technology and media based listing-introduction services.  Co-investing in investment transactions is also an exempted activity.
Section 201 (c) of the JOBS Act:  Uniform Media Broker Exemption Rules For Internet, Radio, Television, Newspapers and Telephones in Rule 506 Offerings
This article discusses how the broker registration exemption created by the JOBS Act applies to people who operate a wide range of media and technology tools used to reach investors in any Rule 506 offering.  Rules about services and fees for services should be uniform for all media and technology tools (including Internet, Radio, Television, Newspapers and Telephones), which undermines the SEC's initial pronouncements about what fees Internet platform operators can charge.
Section 201 (c) JOBS Act: What Services and Fees Can Exempt Platforms and Finders Provide and Charge in Rule 506 Offerings?
This article discusses why the SEC's narrow interpretation of the activities and fees for listing-introduction services, due diligence and providing investment form documents that the JOBS Act exempts is inconsistent with both the statute and common practices in many private placements.
Tough Time Making a Living in the Crowd: What Services Crowdfunding Platform Operators Allowed to Prove and What Fees Can They Charge?
This article discusses why the Crowdfunding rules' tight limits on the fees Crowdfunding portal operators will be able to charge and the tools they will be able to provide investors to identify investment opportunities will cause both businesses raising capital and investors to choose Rule 506 offering platforms over Crowdfunding portals.
This article discusses an SEC letter (issued in 2014) that explains the conditions business brokers and other finders have to meet to be exempt from registering as a broker when they sell a business.
Salesmen vs. Matchmakers: What do Deal Makers Do?  And How Should that Drive Securities Regulations?
This article explains the value many finders bring to transactions that go beyond just acting as sales people and why the functions finders perform in deals that are too small for most registered brokers justify expanded exemptions from registration for finders.
Proposed Finders Exemptions in Capital Raising Deals:  If M & A Brokers are Exempt from Registration, Why Are Capital Raising Finders not Exempt?
This article discusses several exemptions for finders in capital raising transactions proposed by the American Bar Association and others.
Do Issuers and Issuer Employees and Contractors Have to Register as Brokers or Dealers?
This article discusses the exemption from the broker-dealer registration requirements of the Securities Exchange Act that issuers of securities and their employees rely on and circumstance in which these exemptions can be lost.
Special Purpose Entities: The Rise of Online Single Purpose Venture Capital Investment and Buyout Funds
This article discusses a business model finders can use that does not require them to register as a broker-dealer.  Single purpose venture capital funds can be formed for each investment transaction.  Instead of collecting a commission for closing the investment, the manager who organizes the fund can receive a carried interest in profits and an annual management fee like traditional venture capital funds that invest in many different companies.  The article discusses the exemption available from requirements to register as an investment adviser and raises the question: Why raise one fund that invests in ten companies when you can set up ten funds to invest in ten companies, especially now that technology can speed the capital raising process?
New Deal-Makers: Social Media Digital Marketing Consultants Find their Place in Securities Offerings
This article discusses the roles Social Media marketing consultants can play in Internet based Rule 506 offerings and how they should operate to avoid being required to register as a broker-dealer under the Securities Exchange Act.  Where is the line between lead generation and regulated sales activities for Social Media marketing consultants?
State Regulation of Deal Makers: Offering, Broker-Dealer and Investment Adviser Laws
This article describes state laws that govern brokers and investment advisers and how to navigate these state requirements.


If you would like to learn more, you can reach me at
Or you can check out my eLearning course at
or read my newspaper articles at



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