We have warned many times in the past about the consequences of violating U.S. Securities laws, particularly unregistered broker activity.
A question we often get is whether you can use a consulting agreement to raise money for someone else’s syndicate, and the answer to that is a hard and fast “NO!” The SEC considers that to be selling securities without a license, which carries the risk of financial penalties, or even worse: jail time.
And it’s not just the unlicensed person selling securities who can be held liable. While an issuer of securities can rely on an exemption to sell its own securities, they could lose the exemption if the issuer is found to be paying “transaction-based compensation” to anyone without an appropriate securities license. “Transaction-based compensation” means any compensation where it appears you are being paid a commission based on the amount of money you raise. This is true regardless of whether the person receiving transaction-based compensation is part of the company selling the securities or not. Only a licensed securities broker-dealer can raise money for a third party and earn a commission.
Now a recent press release from the SEC underscores that it is keeping a particularly close eye on capital raisers to ensure they are adhering to its rules on raising money from investors.
In a Sept. 12, 2024, release, the SEC announced it had settled charges against three sales agents from StraightPath Venture Partners for unregistered broker activity, including selling membership interests in LLCs that purported to invest in shares of pre-IPO companies.
Each of the three “allegedly provided investors with marketing materials, advised investors on the supposed merits of the investments, and received transaction-based compensation, all hallmarks of a broker, despite not being registered as brokers,” the SEC said. Collectively, the sales agents solicited some $17 million in funds from at least 75 investors and obtained approximately $2.1 million in transaction-based compensation, the release said.
In settling the charges by the SEC, the three neither admitted nor denied the findings, but did agree to substantial fines and penalties to the tune of more than $2.85 million between them.
What is the lesson in this for you?
If you are an investor and someone introduces you to a Syndicator, ask whether they are being compensated and how. If you are an Issuer, don’t pay commissions to people who refer investors.
Paying an unlicensed broker could cause the Issuer to lose its exemption, and could result in prosecution of the person acting as an unlicensed securities broker.
We have numerous articles on our website related to this subject and our two Amazon No. 1 best-selling books contain in-depth information about how to legally compensate capital raisers or finders. For information on how to get your copy of one of these valuable resources, click here.
