SEC Sued to Exempt Finders from Broker-Dealer Regulation

4 min

On July 24, 2019, the Securities and Exchange Commission (SEC) was served in a case that may provide insight into the point at which the activities of a finder cross the line into the activities of a broker subject to registration. This area of law has been a source of consternation for many years. A review of the enforcement record and SEC guidance presents little room for a finder to operate without a requirement to register as a broker-dealer. Firms that limit their corporate financing activities to such services as advising on capital raising and corporate restructuring, and acting as placement agents for the private sale of securities to investors may be interested in the outcome of this case.

For a more in-depth discussion of the distinction between finders and brokers, applicable regulations, and SEC guidance, please see our prior article "Finders and Unregistered Broker-Dealers."

On March 22, 2019, Platform Real Estate Inc. (Platform) filed a complaint against the SEC seeking a declaratory judgement determining that finders in private placement transactions are not required by Section 15(a) of the Securities Exchange Act (the Act) to register as brokers.1

Platform's argument is that the SEC has taken an unduly expansive interpretation of Section 15(a) of the Act. Platform contends that Congress's intent was that the Act would cover "transactions in securities as commonly conducted upon securities exchanges and over-the-counter markets effected with a national public interest." Platform also points to language in the statutory definition of a broker, which requires the registration of all persons "utilizing exchange facilities to effect transactions."2

Platform argues that the activities of a finder in raising capital via private placement transactions bares "little resemblance to the secondary trading transactions done through securities exchanges or over the counter markets."3

In support of its argument, Platform highlights what it claims to be the ad hoc and inconsistent enforcement approach of the SEC, citing as examples an enforcement action brought against a law firm for referring clients to qualifying investments and the absence of an enforcement action against the hit show Shark Tank for taking an equity investment in young companies in exchange for "brokering" access to potential angel investors.4

Platform's complaint appears to raise some new issues regarding congressional intent and interpretation of the Act, but concerns with the SEC's broad reading of the statute is certainly not new for the SEC. In fact, in a 2015 presentation to the SEC Advisory Committee on Small and Emerging Businesses (the Committee), Committee member Gregory C. Yadley noted that the registration process for a broker dealer is too burdensome for finders, and an exemption or separate registration process should be provided. Mr. Yadley noted in his presentation that the current broker-dealer registration system is overwhelming; a finder working for smaller businesses would find it unreasonable to maintain minimum net capital, submit audited financial statements, or maintain the compliance infrastructure required of a full-service brokerage firm.5

A separate registration process for finders was established by FINRA and the SEC in 2017 when the Capital Acquisition Broker (CAB) regulations were approved. The CAB rules were presented as a streamlined set of compliance and conduct rules for firms that meet the definition of capital acquisition broker.  In practice, the FINRA rules that were dropped from the CAB regulatory regime were not applicable to the business of finders in the first instance and the FINRA rules that remain and the registration process for CABs still present a significant regulatory burden for finders.

The SEC's answer to the Complaint is due 60 days from service. The answer may shed significant insight into the SEC's understanding of its mandate under the Act with respect to broker regulation and may yield clues about potential future regulatory action.

We will continue to monitor this case and will provide additional updates as the case progresses.


[1] Complaint, Platform Real Estate Inc. v. United States Securities and Exchange Commission, U.S. Southern District of New York, Case No. 19-CV-2575 (the Complaint).

[2] Complaint pg. 4–5.

[3] Complaint pg. 4.

[4] Complaint pg. 6–7.

[5] See Gregory C. Yadley, Notable by Their Absence: Finders and Other Financial Intermediaries in Small Business Capital Formation (June 3, 2015).

[6] See FINRA Regulatory Notice 16–37 (Oct. 2016).