In my role helping companies raise up to $50 million in new capital using equity crowdfunding, I am frequently asked if a company that wishes to pursue a Regulation A+ capital raise must hire a broker-dealer for the offering. I have written an in-depth article about this on Medium, which you can read here (if you like to read stuff lawyers write and enjoy footnotes and long-winded legal analysis). On the other hand, if you want the simple Cliff Notes version, keep reading below!
The simple answer to the title question above is that moving forward with a Regulation A+ offering without a broker-dealer attached is a dangerous move for an issuer, even though it technically can be done. However, if an issuer wants to sleep well at night and not worry that one of the 50+ state securities regulators or the SEC will come knocking on their door, then bite the bullet and hire a broker-dealer who is licensed in all 50 states and by FINRA for your Regulation A+ offering.
The big issue related to hiring a broker-dealer for most issuers is the cost. A broker-dealer will likely have up front due diligence costs, and will charge a percentage of the funds raised in the offering as a commission. This raises this important question: Will an issuer save money by not hiring a broker-dealer?
Up front, maybe. In the long run, probably not. As illustrated below, in order to go forward on a Regulation A+ offering without a broker-dealer, an issuer may have to register as a “dealer” in many states and at the federal level, which will cost thousands in legal and filing fees. Assuming everything is done correctly and runs smoothly, registering with all of these entities could involve hefty up-front costs, and in most cases far more than the broker-dealer would have charged for due diligence. More importantly, if anything is done wrong in that registration process in any of the venues, or if any state or federal securities regulator thinks something was done wrong, then there will be huge costs to fight the enforcement actions that could arise all over the country.
Why do companies even consider taking on all of this risk by not hiring a broker-dealer?
Regulation A+ of the JOBS Act is silent as to whether an issuer must hire a broker-dealer in order to sell unregistered securities to the general public under this JOBS Act exemption. Given this silence, most legal authorities agree that the law and SEC rules related to Regulation A+ do not, on their own, require an issuer to hire a FINRA licensed broker-dealer to sell their unregistered securities. Therefore, some issuers feel this is enough of a justification to go at it without a broker-dealer.
What these companies are missing is that the text of Regulation A+ and the SEC regulations related to the statute are not the sole consideration in this matter given that securities are being sold. Other state and federal laws and regulations that regulate who may sell securities may prevent an issuer from selling their own Regulation A+ securities without a licensed broker-dealer in some jurisdictions. The JOBS Act waiver of state Blue Sky review does not necessarily prevent the states from regulating who can sell Regulation A+ securities in their state. Because each state has its own set of laws related to who is allowed to sell securities, who must be registered to do so, and under what circumstances securities can be sold by that entity, there are valid concerns that a state regulator could impose significant penalties on an issuer who chooses to sell its Regulation A+ securities within that state, without a broker-dealer licensed in that state.
So, you ask, what is the worst case scenario if a company decides to try to save a few dollars, and sell their Regulation A+ securities on their own? Let me give you the scenario that would keep me awake at night, and the one that typically compels me to advise my clients to hire a broker-dealer and not go at it alone:
Let’s say the company sells its Regulation A+ securities to a little old lady in Florida, without using a broker-dealer registered in Florida. The company does not do well, or the stock is listed on an exchange and the price drops. Little old lady hires a lawyer, and wants her money back. She also contacts the state securities regulators in Florida, and tells them about this mean and awful company that took her retirement savings away from her.
The lawsuit and the state securities regulators review will probably show that the company did not comply with every aspect of Florida securities law, in particular, by not hiring a broker-dealer (which would have rendered the case moot).
Do you think a Florida jury is going to side with a company that violated state law and sold stock to the little old lady? Do you think securities regulators are going to help the little old lady, or the company that violated its state’s securities laws?
The result could be rescission of the agreement to sell the stock – meaning the little old lady gets her money back. There could also be rescission ordered for all investors in the state, meaning a huge financial problem for the issuer who has to give money back to everyone who invested, not just the little old lady. On top of that, fines and penalties could be ordered. And, to make matters worse, a court or the state regulators could extend the penalties against the officers and directors of the company personally, particularly if they were involved in selling activities themselves.
Ouch.
All avoidable by simply hiring a broker-dealer.
I’m not alone in my concerns here. Kat Cook is the Chief Compliance Officer for Keystone Capital Corporation, a FINRA licensed broker-dealer with experience in Regulation A+ arena and other areas of the rapidly emerging FinTech industry. Cook believes that this threat is very real of having to rescind all subscriptions agreements and return capital raised if a state securities regulator finds that local laws were not complied with. “Compliance with Reg A+ means that the issuer should hire a very knowledgeable JOBS Act securities attorney and retain a supporting broker-dealer to help…or prepare to give the funds raised back to the investors,” warns Cook.
If you want far more in-depth analysis and some state law citations that let you dig deep into this, click here https://medium.com/@KendallAlmerico/do-you-need-a-broker-dealer-for-regulation-a-7308535d9b19 and read my Medium article.
Kendall Almerico is an attorney based in Washington DC whose practice involves JOBS Act related securities offerings such as those involving Regulation A+ or Regulation CF. This article should not be considered as legal advice, and the opinions expresses in the article are personal opinions of Mr. Almerico and should not be relied upon by anyone as legal advice. Other lawyers may have different opinions. The topics covered in this article are very complex, and any company considering using Regulation A+ or selling securities in any manner should seek the advice of competent and experienced legal counsel before making any decisions related to the matters set out in this article.