There are regulatory do’s and don’ts for what services financial intermediaries can and cannot provide when helping entrepreneurs source investors. Much depends on federal and state licensing requirements for their service offerings. As a training and advisory concern, we are always asked about introductions to investors in our network. If you are seeking investors for your enterprise become familiar with the regulatory landscape.
First, you should understand what is meant by Issuer. An Issuer is the entity responsible for the capital raising activity. For instance, if you are raising capital directly through the means of a private placement you are considered a Self-Issuer vs if you are using a financial institution, say a broker dealer, then they are the Issuer. There are also general solicitation regulations that you need to consider when soliciting investors with just a business plan, but I’ll address that in another post.
Capital Market Financial Service Intermediaries
Consultants: Providing training and advisory services for self-issuers only, excluding investor introductions, negotiations or other involvement with the securities transactions. No licensing requirements.
Unregistered Finders: Making introductions to investors than becoming totally hands off. No involvement with negotiations or any aspect of the securities transactions. A No Action Letter from the SEC may be prudent.
Registered Finders: In some instances, both the SEC and certain states have registration requirements, once registered finders provide services as allowed by their license.
Angel Networks: An organized group of accredited investors who seek opportunities to invest in early stage or start-up companies. Members generally invest individually from their own funds. The network approves investor members and set criteria for companies seeking access.
Crowdfunding Portals: From SEC regulations that are still not implemented through states that have created their own crowdfunding regulations there’s a lot of information on this subject and a one or two line comment here will not do it justice. Be prudent when you enter this space, but in general donation, reward, and accredited investor-led crowdfunding platforms are hitting significant strides. It's federally-led equity based crowdfunding that muddies these waters.
Brokers and Registered Investment Advisors: Licensed individuals whose activities are supervised by either a licensed and registered firm or self-regulatory agency. Provide limited support in the small business / self-issuer market.
Broker Dealers / Investment Bankers / Placement Agents: Licensed and registered firms providing limited to full financial services to include initial public offerings, private placements, and market making activities. These agencies provide limited support in the small business / self-issuer market.
For the most part, the regulations focus on how much activity an intermediary has with the security transaction and any compensation surrounding their activities. The brokerage industry’s regulatory framework in this respect is designed to protect its members and the investing public. Licensed and regulated individuals and firms are monitored by the SEC, FINRA, and other self-regulatory organizations. Service providers that work outside of this framework are essentially unregulated with no oversight.
Why is this important to you? There are significant consequences to engaging unlicensed financial intermediaries “doing the business of a licensed individual or entity”, especially when things go wrong. You could be required to rescind all transactions, thereby having to return all money raised from investors. While this is the worst case scenario, it’s a reality. Learn to protect your business and its investors by ensuring you engage in raising capital compliantly.
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