Wednesday, October 1, 2014

New Deal-Makers: Social Media Digital Marketing Consultants Find their Place in Securities Offerings (Article 13 in a series of 14 articles about Deal-Makers)


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 JFV@WardandSmith.com.
Or you can check out my eLearning course at www.YouTube.com/eLearnSuccess
or read my newspaper articles at


This article is one of 14 articles in a series of articles about Deal-Makers called:

LET'S MAKE A DEAL: REGULATING DEAL-MAKERS ON WALL STREET, MAIN STREET AND IN SILICON VALLEY IN THE CROWDFUNDING ERA

For many years you could easily predict the team of people who would be working together on a securities  offering. 

The capital raising team included two or more of the "usual suspects":

·         The issuer's officers.
·         Lawyers.
·         Investment bankers or finders.
·         Financial consultants.
·         Accountants.

With the rise of Internet as the most cost efficient tool to sell most products and services and changes in securities laws that permit advertising and general solicitations in SEC Rule 506(c) private placements and crowdfunding securities offerings, new players are becoming increasingly important to the securities offering team – Social Media marketing consultants.

Before we explore the roles Social Media consultants can play in securities offerings without violating securities laws, we should remind the old players that they need to adapt what they traditionally have done to the new sales tools the new players are bringing to the table.  The old payers know how to talk with one another.  They know what roles they each play, what roles others play and where they need to coordinate their efforts. 

 The old payers will have to adapt to do the same with Social Media consultants.  Change is coming quicker that some people think.  Already, business people are referring to crowdfunding "campaigns" instead of "offerings."  The old team members will have to adapt quickly to fit new "campaigns" into regulatory boxes built for "offerings." 

Old team members won’t be effective in their jobs, if they just say no to everything.  "Campaigns" will have to combine new ways of communicating with established principles of anti-fraud compliance.

For example, lawyers will have to learn how to review and revise Social Media communications to ensure compliance with anti-fraud rules without destroying effective communication.  Investment bankers will have to learn how to pick up the ball to sell the offering to leads generated by the Social Media team.  It will take time for these players to learn how to dance with one another.  Initially, it won’t be pretty.  Expect a few toes to be stepped on during the learning process.

The offering team will initially focus on the anti-fraud rules and offering exemptions of the Securities Act of 1933.  That's the primary statute that regulates securities offerings.  But the Securities Act isn't the only regulatory driver.

The learning process will go much smoother, if everyone on the team understands how broker-dealer and investment adviser rules shape what Social Media consultants are allowed to do and what they cannot do without registering either as a broker-dealer under Section 15 (a) (1) of the Securities Exchange Act of 1934 or as an investment adviser under the Investment Advisers Act of 1940 and the state counterparts of these laws.

Now, let's examine how the broker-dealer registration provisions of Section 15 (a) (1) of the Securities Exchange Act and the investment adviser registration provisions of the Investment Advisers Act are likely to shape the roles Internet and Social Media consultants will likely play in securities offerings.

In this examination we will focus on:

      ·         The fees Social Media consultants can charge.

·         The activities Social Media consultants can perform without being deemed ot be making "recommendations" or providing "investment advice."

The securities compliance challenges Social Media consultants will face will depend in large part on how hands on the consultants become in the Social Media campaign.  Consultants who merely advise issuers and train issuer employees to implement the campaign will have a relatively easy compliance task.  Consultants who become more hands on by implementing the campaign, including interacting online with potential investors, face greater risks that they will cross the line into activity that requires them to register.

 


Opportunity for Deal Makers

As we discussed in article (7) of this series of articles, the SEC's proposed crowdfunding rules limit the value that crowdfunding platform operators under Section 201 of the JOBS Act can add to offerings with strict rules about how crowdfunding platforms can operate.

The SEC's regulatory rules create a market opportunity for other deal makers to compete with crowdfunding platforms by offering useful services to both investors and companies raising capital. 

That's why many deal makers will choose to ignore crowdfunding platforms and will instead conduct offerings under SEC Rule 506 (c), which permits deal makers to utilize the best combination of:

  • In person sales efforts.
  • Traditional advertising.
  • Internet technology platforms similar to those used for "Crowdfunding."
  • Issuer websites and
  • Social Media communications.
Each of these communications media will have roles to play in different Rule 506 (c) offerings.  Many offerings will use a combination of all of them.

Crowdfunding "Recommendations and "Investment Advice"

Deal makers (including consultants who plan and implement Social Media marketing campaigns in securities offerings) will, however, have to be careful to avoid making "recommendations" or providing "investment advice," if they are not registered as broker-dealers, keeping in mind the SEC's broad views (expressed in its Crowdfunding Release) about what types of statements and technology features may constitute a "recommendation" or "investment advice."

We discuss the SEC's expansive views about what constitutes recommendations and investment advice in article (7) of this series of articles in the context of strict regulations about how operators of crowdfunding platforms present information about companies to investors.  If the same rules were applied to communications outside of crowdfunding platforms, virtually every communication about an issuer by a third party service provider would be a "recommendation" or "investment advice," which would require these service providers to register as a broker-dealer under Section 15 (a) (1) of the Securities Exchange Act of 1934.

Fortunately, the SEC's strictest rules about what constitutes "investment advice" or a "recommendation" are focused on crowdfunding platforms where the SEC believes that anything that places one issuer in the limelight compared to other issuers using the same platform constitutes "investment advice" or a "recommendation" by the platform operator who operates under Article III of the JOBS Act.  Because Social Media campaigns do not involve the same side-by-side beauty contests that are inherent parts of how offerings are conducted on crowdfunding platforms, many of these crowdfunding platform rules are not relevant to Social Media campaigns. 

Despite these differences, anyone who participates in a Social Media campaign or advises about statements made on a technology platform that operates in a Rule 506 offering should view with alarm the SEC's pronouncements about what constitutes a "recommendation" or "investment advice" by crowdfunding platform operators. 

The crowdfunding rules are a good lesson on how the SEC might deem even innocuous statements in Social Media campaigns that do not include price, valuation or pressure to buy securities to be "recommendations" or "investment advice."

People who are the modern equivalent of advertising consultants and technical service providers should not be held responsible for the messages their clients use in sales campaigns and should not be deemed to be giving "investment advice" or making "recommendations" in their Social Media and other online interactions with potential investors as long as they use only information provided or approved by the issuer or a registered broker-dealer.  Social Media campaigns are more like lead generation than part of the process of closing a deal.

Hopefully, the SEC will respect this wall between technology implementers and sales people.  Predicting what the SEC will do is risky, because the SEC often takes positions for administrative convenience.  If the SEC thinks it will be difficult enforce detailed rules about what Social Media consultants can and cannot do, the SEC may announce broad rules that severely limited permitted activities.

If the SEC instead follows the logic of what other people are allowed to do without registering, Social Media service providers who do not hold themselves out to be investment bankers or other experts that vouch for the content they are distributing and do not try to close an investment transaction, should not be required to register as broker-dealers.

But Social Media consultants should be aware that their campaigns will offer many opportunities and temptations to cross the line from implementation into selling, because Social Media marketing usually requires real-time interaction with people to keep them engaged.  The problem is that there is no well-defined wall between implementation and selling in Social Media campaigns like there is when an advertising agency plans a campaign, shoots commercials and buys television air time.  The advertising agency doesn't become in involved in real time interaction with people the way the people who implement Social Media campaigns do.

The SEC casts a big net when it defines what activity causes you to be a broker that has to register under Section 15 (a) (1) of the Securities Exchange Act of 1934.  Given the relatively short history of Social Media securities marketing, it's somewhat unclear how traditional SEC positions will relate to people who implement Social Media campaigns, but we do have three tools to guide us:

  • The SEC made a number of statements about lead generators and promoters in its release No. 33-9470 and 34-7041 dated October 23, 2013, in which the SEC proposed crowdfunding rules for both issuers and platform operators.
  • SEC Rule 3a4-1 creates a "safe harbor" that protects certain "associated persons" of an issuer from broker-dealer registration requirements. 
  • NASD Rule 1060 (a) regarding Persons Exempt from Registration and NASD Notice to Member 88-50 regarding Registration of Persons Soliciting on Behalf of Members Under Schedule C of the NASD Bylaws define the boundaries between the types of tasks non-registered employees of broker-dealers are allowed to perform and the tasks only registered persons can perform.
From these three sources of guidance, it is reasonable to conclude that people who implement Social Media campaigns in Rule 506 (c) offerings can protect themselves from being required to register as a broker under Section 15 (a) (1) of the Securities Exchange Act of 1934 by living by the following rules:
·         Only communicate messages that are approved by the issuer's management.
·          Avoid communicating with investors the way brokers have traditionally communicated by telephone or attending meetings with investors.  Social Media interactions usually play to a "crowd."  Broker sales pitches are normally made to specific identified individuals.
·         Identify yourself in all communications as someone who is working on behalf of the issuer.
·         Include in all communications disclaimers that all information is provided by the issuer and does not reflect the Social Media' consultant's opinions about the issuer.
·         Hand leads over to the people who will do the selling.
·         Do not transmit investment documents to investors or collect money or signatures from investors
·         Never handle money or securities.
I note that somewhat different rules would apply if the issuer is selling the offering through a registered crowdfunding platform instead of conducting a Rule 506 (c) offering.

SEC Crowdfunding Proposed Rules Release Statements about Promoters and Lead Generators

Section 4A(b)(3)of the Securities Act of 1933, which was added by Section 302 (b) of the  JOBS Act, provides that an issuer shall “not compensate or commit to compensate, directly or indirectly, any person to promote its offerings through communication channels provided by a broker or funding portal, without taking such steps as the Commission shall, by rule, require to ensure that such person clearly discloses the receipt, past or prospective, of such compensation, upon each instance of such promotional communication.”
In Pages 160 to 161 of the SEC's Crowdfunding rules proposal release (No. 33-9470 and 34-7041 dated October 23, 2013) the SEC commented that:
"As discussed above, the proposed rules would include this prohibition.  We also propose to require the intermediary to inform investors, at the account opening stage, that any person who promotes an issuer’s offering for compensation, whether past or prospective, or who is a founder or an employee of an issuer that engages in promotional activities on behalf of the issuer on the intermediary’s platform, must clearly disclose in all communications on the platform the receipt of the compensation and the fact that he or she is engaging in promotional activities on behalf of the issuer. We believe that requiring intermediaries to inform investors about these disclosure obligations at the outset of their relationship should help to ensure and monitor issuers’ compliance with Section 4A(b)(3) and the proposed rules, as it would alert investors that information about the participation of issuers or representatives of issuers would have to be disclosed at a later time.  Promoters also would need to disclose this information each time they post a comment in the communication channels on the platform."
Although the SEC is commenting here on crowdfunding offerings and not Rule 506 (c) offerings, the first rule of thumb for anyone being compensated by an issuer that is raising capital in any type of offering using Social Media is to let potential investors know that they are being compensated by the issuer to make comments about the offering or to engage potential investors.
Social Media consultants should also use disclaimers that indicate they are transmitting information the issuer has provided and the information does not reflect views of the consultant.
The foregoing comments related to promoters and lead generators who are hired by an issuer.  Other crowdfunding provisions relate to people that crowdfunding platform operators hire.
Section 4A(a)(10) provides that an intermediary in a transaction made in reliance on Section 4(a)(6) shall not compensate “promoters, finders, or lead generators for providing the broker or funding portal with the personal identifying information of any potential investor.”
In Pages 197 to 200 of the SEC's Crowdfunding rules proposal release (No. 33-9470 and 34-7041 dated October 23, 2013) the SEC commented that: 
The terms “promoters,” “finders” and “lead generators” are not defined in the statute.
The proposed rules would broadly prohibit an intermediary from compensating any person for providing it with the personally identifiable information of any investor or potential investor. . . . We believe that any person compensated for providing the personally identifiable information of potential investors would be acting as a promoter, finder or lead generator within the meaning of Section 4A(a)(10).  Thus, the proposed rules would prohibit compensation broadly to “any person.”
The SEC then went on to discuss the type of compensation that is permitted:
"The proposed rules would, however, permit an intermediary to compensate a person for directing issuers or potential investors to the intermediary’s platform if (1) the person does not provide the intermediary with the personally identifiable information of any potential investor, and (2) the compensation, unless it is paid to a registered broker or dealer, is not based, directly or indirectly, on the purchase or sale of a security offered in reliance on Section 4(a)(6) on or through the intermediary’s platform."
"The proposed rules would not permit a funding portal to compensate third parties by commission or other transaction-based compensation unless that third party is a registered broker or dealer and thereby subject to an established regulatory and oversight regime that provides important safeguards to investors."
The SEC explained the reasons for its position against paying "transaction-based compensation" as follows:  "We believe that the prohibition on transaction-based compensation in the proposed rules would help to remove the incentive for high-pressure sales tactics and other abusive practices."
In footnote 513, the SEC further explained the reasons why "transaction based compensation" is prohibited:
"See Persons Deemed Not to Be Brokers, Release No. 34-22172 (June 27, 1985) [50 FR 27,940, 27942 (July 9, 1985)] (“Compensation based on transactions in securities can induce high pressure sales tactics and other problems of investor protection that require application of broker-dealer regulation.”). See also 158 CONG. REC. S5474-03 (daily ed. July 26, 2012) (statement of Sen. Jeff Merkley) (“[T]he limitation on off-platform advertising is intended to prohibit issuers—including officers, directors, and 20 percent shareholders—from promoting or paying promoters to express opinions outside the platform that would go beyond pointing the public to the funding portal.  Such paid testimonials and manufactured excitement would represent a prohibited form of off-site advertising if those disclosures were not present. Whether on or off the platform, paid advertising must clearly be disclosed as such. In short, the investor deserves a transparent medium for making healthy decisions.”)." 
This obviously raises the question of what is "transaction based compensation and what is not.  The SEC explained
Under the proposed rules, an intermediary could pay a person a flat fixed fee to direct other persons to the intermediary’s platform through, for example, hyperlinks or search term results, if the intermediary received no personally identifiable information.  Although the statute is clear that an intermediary cannot pay for the personally identifiable information of potential investors, we do not believe Congress intended to disrupt current practices, such as paying for advertising based on Internet search rankings. It would be acceptable under the proposed rules, therefore, for an intermediary to make payments to advertise its existence, provided that in doing so, it does not pay for the personally identifiable information of investors or potential investors.
In footnote 514, the SEC further distinguished flat fixed fees from success fees.
"A flat fixed fee is one that is not based on the success of the offering, and so would not be transaction-based compensation.  A noted above, receipt of transaction-based compensation would strongly indicate that the recipient is acting as a broker, and the party receiving this kind of compensation needs to consider whether it would be required to register as a broker."
As discussed above, the foregoing comments relate to crowdfunding and not to Rule 506 (c) offerings.  However, in footnote 519 on page 201, the SEC indicates it believes that except as required by the statute, it thinks the same rules should apply to technology platforms under Rule 506 (c) as crowdfunding platforms:
"See NSBA Letter; RocketHub Letter 1. See also Applied Dynamite Letter (stating that the requirements for those who wish to be intermediaries in offerings pursuant to Rule 506 of Regulation D should be harmonized with those for funding portals, and that we should provide for a common registration process for the two).  We note, however, that Securities Act Section 4(b)(1) provides an exemption from broker-dealer registration for certain portals facilitating transactions pursuant to Rule 506 of Regulation D, as revised by Section 201 of the JOBS Act." 
As we discuss in detail in article (4) of this series of articles, the SEC's position is that Section 201 of the JOBS Act is only relevant to venture capital funds that use technology platforms to attract other investors to their portfolio companies.  In footnote 519 of its Crowdfunding rules release the SEC is indicating that if you fall outside the protection of Section 201 of the JOBS Act you should be required to register to operate a technology platform. 
If the SEC believes that technology platform operators should register to conduct Rule 506(c) offerings, it is reasonable to conclude that the SEC's views about how promoters and leads generators can be compensated are likely the same for both crowdfunding offerings and Rule 506 (c) offerings.  To date, however, the SEC has not issued special rules for registering Rule 506 offering platform operators.  In the absence of such rules, platform operators who are not registered broker-dealers will either register or be prepared to fight the SEC either by relying on Section 201 of the JOBS Act (which we discuss in articles (4), (5) and (6)  of this series of articles) or by relying on cases in which some courts have disagreed with the SEC (which we discuss in article (3) of this series of articles).
We take away two basic principles from the SEC's crowdfunding release for people who act as promoters and lead generators in Rule 506 (c) offerings:

·         Identify yourself as someone who is being compensated by the issuer to promote the offering.

·         Structure your fees as a flat fixed fee for work performed that is not measured by the success of the offering to avoid accepting "transaction based compensation" that could require you to register as a broker under Section 15 (a) (1) of the Securities Exchange Act of 1934.

Now, let's turn to rules that relate to persons associated with issuers for additional guidance about what people who conduct Social Media campaigns can do without being required to register as a broker under Section 15 (a) (1) of the Securities Exchange Act of 1934.

Associated Persons of Issuers

In article (11) of this series of articles, we discuss rules that determine whether people who are associated with issuers are required to register as brokers.

People who provide Social Media services to issuers in securities offerings will not always be employees of issuers, but non-employee consultants should limit their activities to things employees could do without being required to register as a broker. 

So, let's examine the exemptions from registration for people who are associated with issuers In light of the activities Social Media and other digital marketing consultants are likely to perform in securities offerings.

Persons Associated with Issuers

SEC Rule 3a4-1 creates a "safe harbor" that protects certain "associated persons" of an issuer from broker-dealer registration requirements.  An associated person can be a partner, officer, director, employee of the issuer or of any affiliate or registered investment adviser. 

Rule 3a4-1 is a "safe harbor" provision.  You are not necessarily a broker-dealer, if you do not satisfy the requirements of the safe harbor.  The SEC's staff has indicated that they believe it would be difficult for the managers of "private funds" to qualify for this safe harbor, but most managers of venture capital, private equity, hedge funds and other private funds do not register as broker-dealers, which illustrates that the industry operates outside protection afforded by the safe harbor.  People who act as lead generators or promoters in Social Media campaigns will probably follow the lead of fund managers who protect themselves by operating within the spirit of Rule 3a4-1.

To qualify for this "associated person" safe harbor, the person must satisfy all of the following:

·         "Is not subject to a statutory disqualification, as that term is defined in section 3 (a) (39) of the Act, at the time of his participation;"
The "safe harbor" does not apply if you are a "Bad Actor" or if you receive sales commissions or if your compensation is otherwise directly or indirectly based on transactions in securities.
·         "Is not compensated in connection with his participation by the payment of commissions or other remuneration based either directly or indirectly on transactions in securities;"
AND
·         "Is not at the time of his participation an associated person of a broker or dealer;"

AND
If you satisfy both these requirements of Rule 3 a 4-1, you fall within the safe harbor if you satisfy any one of the following criteria.
(1)   "The associated person restricts his participation to transactions involving offers and sales of securities: (i) to certain institutional investors including registered brokers or dealers; a registered investment companies, insurance companies; a banks and registered investment advisers; or (ii) that are exempted by reason of section 3 (a) (7), 3(a)(9) or 3(a)(10) of the Securities Act of 1933 from the registration provisions of that Act; or (iii) That are made pursuant to a plan or agreement submitted for the vote or consent of the security holders who will receive securities of the issuer in connection with certain corporate transactions, including reorganizations, mergers and other acquisition transactions; or (iv) that are made pursuant to the issuer's employee benefit plans."
OR
(2)   "The associated person meets all of the following conditions:: (i) primarily performs, or is intended primarily to perform at the end of the offering, substantial duties for or on behalf of the issuer otherwise than in connection with transactions in securities (this would cover people who primarily engage in operating the issuer's business); and (ii) was not a broker or dealer, or an "associated person of a broker or dealer", within the preceding 12 months (this provision obviously is meant to protect against an issuer hiring a broker or an employee to avoid the rules); and (iii) does not participate in selling an offering of securities for any issuer more than once every 12 months other than activity permitted by (1) above and (3) below (this would disqualify people who raise money for multiple issuers).  Associate persons of a broker or a dealer include: any partner, officer, director, or branch manager of such broker or dealer (or any person occupying a similar status or performing similar functions), any person directly or indirectly controlling, controlled by, or under common control with such broker or dealer, or any non-clerical employee of such broker or dealer and people required register under state laws, unless the only reason they must register is their affiliation with the issuer."
OR
(3)   "The associated person restricts his participation to any one or more of the following activities: (i) Preparing any written communication or delivering such communication through the mails or other means that does not involve oral solicitation by the associated person of a potential purchaser; Provided, however, that the content of such communication is approved by a partner, officer or director of the issuer; (ii) responding to inquiries of a potential purchaser in a communication initiated by the potential purchaser; Provided, however, that the content of such responses are limited to information contained in a registration statement filed under the Securities Act of 1933 or other offering document; or (iii) performing ministerial and clerical work involved in effecting any transaction."
The three types of people who meet the last part of the "safe harbor" definition include:
·         people who sell only to designated institutional investors;
·         people who do not otherwise work for brokers who both (x) perform substantial duties for the issuer other than selling the securities of the issuer and (y) sell securities of the issuer not more often than once in any 12-month period;
·         people who only write descriptions about the issuer or its business, if what they write is approved by others;
·         people who only communicate what others write or approve;
·         people who respond to questions, if their responses quote a registration statement.
Obviously, in a private placement there is no "registration statement" to quote from.  Quoting from a private placement memorandum approved by others would be outside the specific words of the safe harbor, but would be consistent with the spirit of the types of activities that do not cause you to be broker because they merely transmit what others write or approve.
FINRA and NASD Rules for Non-Registered Personnel of Registered Broker-Dealers
A third source of guidance about what Social Media consultants can have their personnel do in securities offerings comes from NASD and FINRA rules about what registered broker-dealers are allowed to have their unregistered personnel do.  The two primary sources of guidance are:
  • NASD Rule 1060 (a) regarding Persons Exempt from Registration.
  • NASD Notice to Member 88-50 regarding Registration of Persons Soliciting on Behalf of Members Under Schedule C of the NASD Bylaws.
These rules generally describe administrative and clerical personnel who are not required to be registered representatives or assistant representatives.
NASD Rules 1041 Registration Requirements for Assistant Representatives and 1042 Restrictions for Assistant Representatives offer additional guidance about what activities are not considered to be administrative or clerical in nature and require some form of registration.
NASD Rule 1060 (a) Persons Exempt from Registration generally provides as follows
(a) The following persons associated with a member are not required to be registered with the Association:
(1) persons associated with a member whose functions are solely and exclusively clerical or ministerial;
(2) persons associated with a member who are not actively engaged in the investment banking or securities business;
(3) persons associated with a member whose functions are related solely and exclusively to the member's need for nominal corporate officers or for capital participation; and
(4) persons associated with a member whose functions are related solely and exclusively to:
(A) effecting transactions on the floor of a national securities exchange and who are registered as floor members with such exchange;
(B) transactions in municipal securities;
(C) transactions in commodities; or
(D) transactions in security futures, provided that any such person is registered with a registered futures association.
NASD Notice to Member 88-50 regarding Registration of Persons Soliciting on Behalf of Members Under Schedule C of the NASD Bylaws generally explains how Rule 1060(a) applies to people who solicit potential customers.  The summary of NASD Notice 88-50 stated its purpose as follows:
"In response to member inquiries, the NASD is publishing guidelines that apply to the employment of unregistered persons to contact prospective customers.  Unregistered persons may extend invitations to firm-sponsored events and inquire whether the prospective customer wishes to discuss investments with a registered representative or receive investment literature from the firm, provided that the firm observes certain practices with regard to the qualification, training, compensation, and supervision of the unregistered persons."
The NASD offered the following explanations to its members:
Unregistered persons may contact prospective customers for purposes of:
·         extending invitations to firm-sponsored events at which any substantive presentations and account or order solicitation will be conducted by appropriately registered personnel;

·         inquiring whether the prospective customer wishes to discuss investments with a registered person; and

·         determining whether the prospective customer wishes to receive investment literature from the firm.
Firms employing unregistered persons to perform these functions should observe the following guidelines:
(l) Pursuant to Section (l)(b), Part n of Schedule C to the By-Laws, unregistered persons may not discuss general or specific investment products or services offered by the firm, pre-qualify prospective customers as to financial status and investment history and objectives, or solicit new accounts or orders.
As stated in Notice to Members 88-24, the registration requirements of Section (l)(b), Part n of Schedule C to the NASD By-Laws do not apply to a member's administrative personnel who, in the normal course of their duties, contact existing customers regarding clerical or ministerial matters affecting such customers' accounts.
As indicated above, unregistered people are allowed to generate leads and find out if prospective customers want additional information.
NASD Rule 1041 draws the line on order processing:
"All persons associated with a member who are to function as Assistant Representatives — Order Processing shall be registered with the Association. Before their registrations can become effective, they shall pass a Qualification Examination for Assistant Representatives — Order Processing as specified by the Board of Governors.
(b) Definition of Assistant Representative — Order Processing
Persons associated with a member who accept unsolicited customer orders for submission for execution by the member are designated as Assistant Representatives — Order Processing."
NASD Rule 1042 imposes further restriction of registered assistants who are allowed to take orders, but cannot solicit orders or provide investment advice.

"An Assistant Representative — Order Processing may not solicit transactions or new accounts on behalf of the member, render investment advice, make recommendations to customers regarding the appropriateness of securities transactions, or effect transactions in securities markets on behalf of the member. Persons registered in this category may not be registered concurrently in any other capacity."
The foregoing NASD and FINRA rules apply to member firms and their personnel, but provide insight to non-members about what specific types of activities the regulators of the broker industry consider to be regulated activity.
We take away from this that the transmittal of communications that are pre-approved by the issuer's management should be a clerical or administrative function that is not a regulated activity.  However, given the nature of Social Media, which depends on using many communications on an interactive basis with potential clients, consultants who provide Social media campaign services to issuers in private placement offerings should coordinate closely with the issuer's management on a regular basis to approve marketing messages being transmitted.  Consultants who decide to be creative in real time interactions with potential investors risk crossing the line between providing technical services into selling securities.
The second takeaway is that there must be a clear hand off to the issuer or to a registered broker when potential investors move from asking for information that has been pre-approved by the issuer for distribution to seeking documents to invest or asking for subjective opinions about the issuer or the offering.
Summary
In summary, people who implement social media campaigns in Rule 506 (c) offerings can protect themselves from being required to register as a broker under Section 15 (a) (1) of the Securities Exchange Act of 1934 by living by the following rules:
·         Only communicate messages that are approved by the issuer's management.
·          Avoid communicating with investors the way brokers have traditionally communicated by telephone or attending meetings with investors.  Social Media interactions usually play to a "crowd."  Broker sales pitches are normally made to specific identified individuals.
·         Identify yourself in all communications as someone who is working on behalf of the issuer.
·         Include in all communications disclaimers that all information is provided by the issuer and does not reflect the Social Media' consultant's opinions about the issuer.
·         Hand leads over to the people who will do the selling.
·         Do not transmit investment documents to investors or collect money or signatures from investor
·         Never handle money or securities.
I note that stricter rules would apply if the issuer is selling the offering through a registered crowdfunding platform instead of conducting a Rule 506 (c) offering.

If you would like to learn more, you can reach me at JFV@WardandSmith.com.
Or you can check out my eLearning course at www.YouTube.com/eLearnSuccess
or read my newspaper articles at
 

 

 
 

 

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