Article

Publication year2014
Pages38
Article
Vol. 27 No. 1 Pg. 38
Utah Bar Journal
February, 2014.

January, 2014.

SECURITIES FINDERS-MORE CONFUSING THAN EVER BEFORE

Brad R. Jacobsen and Fred Pena.

About eight years ago, the Task Force on Private Placement Broker-Dealers issued a report recommending the use of a "simple" registration form and process (1010-EZ) for Private Placement Broker Dealers (PPBDs), or more commonly referred to as Finders. Report and Recommendations of the Task Force on Private Placement Broker-Dealers, Securities & Exch. Comm'n, June 20, 2005, available at http://www.sec.gov/comments/rr/ offer-and-sale/offerandsale-16.pdf. This report prompted the article "Finding a Solution to the Problem with Finders in Utah" (the "Original Article"), because it was a sign of potential progress in the long struggle to settle registration concerns for Finders. See Brad R. Jacobsen & Olympia Z. Fay, Finding a Solution to the Problem with Finders in Utah, 19 Utah Bar Journal 38 (Mar/Apr 2006), available at http://webster.utahbar.org/barjournal/2006/04/finding_a_solution_to_the_prob.html. To understand this article more fully and the discussion below, the authors recommend that you review the Original Article.

Statements made by David Blass, Chief Counsel for the United States Securities and Exchange Commission's (SEC) Division of Trading and Markets, are another mark of potential progress along that path to settle the issue of registration for Finders. David W. Blass, A Few Observations in the Private Fund Space, Securities & Exch. Comm'n, (Apr. 5, 2013), available at http://www.sec.gov/ news/speech/2013/spch040513dwg.htm. Accordingly, Blass's statements have prompted this follow-up to the Original Article.

Blass commented that the Division of Trading and Markets staff (the Staff) has been considering options, from exempting Finders from registration, see Letter sent from the ABA Private Placement Broker Task Force to the SEC, available at http://www.sec.gov/ comments/265-27/26527-26.pdf (last visited September 27, 2013), to providing simplified FINRA registration, Blass, A Few Observations in the Private Fund Space. Blass believes the Staff has made great strides in relation to the simplified registration option due to the SEC's responsibilities under the JOBS Act to provide for simplified funding portal regulations. Id.; see also Jumpstart Our Business Startups Act, Pub. L. No. 112-106, 126 Stat. 306 (codified as amended in scattered sections of title 15 of the United States Code), available at http://www.gpo.gov/fdsys/pkg/BILLS-112hr3606enr/pdf/BILLS-112hr3606enr.pdf.

Unfortunately, for Finders and the issuers who use them, Blass's statements are merely a dream of possible future resolution. Reality is that standards for when a Finder must register as a broker are uncertain because of conflict between the SEC and courts who have heard Finder cases. For an attorney, counseling a client who either is or wants to use a Finder has become more difficult. The risk associated with providing counsel comes from the fact that the SEC has no official stance on registration for Finders and there is discord between Staff comments, No-Action letters, and court rulings. If we advise clients to follow the latest Staff comments or No-Action letters, there is little to no room f or Finders at all. If we advise clients to follow the most recent court proceedings, we could open the client up to SEC action, which is undesirable even if our client obtains a favorable outcome in any proceeding.

Furthermore, like with any securities issue, there are two levels of analysis: what is happening at the federal level and what is happening at the state level. This article provides an in-depth look at the main events that have changed the Finder landscape at the federal level and provides a brief follow-up to Finder registration in the State of Utah.

In brief, the SEC spurned the Anka No-Action letter and has taken a stance for a more limited role for Finders. See Brumberg, Mackey & Wall, PLC, SEC No-Action Letter, 2010 WL 1976174 (May 17, 2010). available at http://www.sec.gov/divisions/ marketreg/mr-noaction/2010/brumbergmackey051710.pdf. The courts have decisively pushed back against the SEC's limited-role stance in favor of a multi-faceted test to determine the need to register. See, e.g., SEC. v. Kramer, 778 F.Supp.2d 1320 (M.D. Fla. 2011). The State of Utah has made no comment on the debate and still prominently posts the Anka No-Action letter on its site library page as the role model to determine if a Finder's activities should require licensure.

THE SEC MOVES AWAY FROM ANNA

Good advice requires good knowledge. A thorough knowledge of the SEC and its choices can help attorneys understand which situations are more likely to bring SEC action, which leads to giving better advice to clients. The SEC's and its Staff's stance on Finders is clear from statements made during the 27th Annual SEC Government-Business Forum on Small Business Capital Formation in April 2013 (the Forum), U.S. Securities and Exchange Commission Twenty-Seventh Annual SEC Government-Business Forum on Small Business Capital Formation Program Record of Proceedings, 154-60 (Nov. 20, 2008) (hereinafter, "Forum"), http://www.sec.gov/info/smallbus/sbforumtrans-112008.pdf, and in a No-Action letter written to the Brumberg, Mackey & Wall law firm (Brumberg), Brumberg, 2010 WL 1976174, at *1-2.

Statements by Staff

It is unclear why the Staff spoke out against Anka; whether it was because the Staff is trying to distance itself from the Anka No-Action letter, because the Staff was tired of Finders incorrectly applying and relying on the Anka No-Action letter, or because of some other reason is irrelevant. What matters is that it happened: Special Counsel Fausti spoke out against Anka, see Forum, at 156-57, and now the funding universe is aware that the Staff does not fully follow the Anka No-Action letter and that relying on it could be detrimental for issuers and Finders.

A complete grasp of the Staff's view cannot be obtained by Fausti's statements alone, but they serve as a...

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