Can Non-Registered Brokers Sell Company’s Shares Under Regulation D Rule 506(b)?

Question from Boca1, Can Non-Registered Brokers Sell Company’s Shares Under Regulation D Rule 506(b)?

Answer from AI:

Understanding Regulation D Rule 506(b)

Regulation D Rule 506(b) is a provision under the U.S. Securities and Exchange Commission (SEC) that allows companies to raise capital through the sale of securities without having to register those securities with the SEC. This rule is part of Regulation D, which provides exemptions from the registration requirements of the Securities Act of 1933.

Who Can Sell Shares Under Rule 506(b)?

Under Rule 506(b), companies can sell their shares to an unlimited number of “accredited investors” and up to 35 non-accredited investors, provided that the non-accredited investors are sophisticated enough to understand the risks involved. However, the question of who can act as a broker to sell these shares is more complex.

Role of Brokers

A broker is generally defined as any person engaged in the business of effecting transactions in securities for the account of others. According to the SEC, brokers must be registered with the SEC and be members of a self-regulatory organization (SRO), such as the Financial Industry Regulatory Authority (FINRA).

Non-Registered Brokers

Non-registered brokers are individuals or entities that are not registered with the SEC or a SRO. Under U.S. law, non-registered brokers are generally prohibited from selling securities, including shares under Rule 506(b). Engaging in such activities without proper registration can lead to severe penalties, including fines and legal action.

Legal Framework and Case Law

The Securities Exchange Act of 1934 requires brokers to register with the SEC. Section 15(a) of the Act makes it unlawful for any broker or dealer to induce or attempt to induce the purchase or sale of any security unless registered.

Relevant Case Law

Several cases have highlighted the importance of broker registration:

• SEC v. Kramer: The court ruled that individuals acting as brokers without registration violated the Securities Exchange Act.
• SEC v. Mapp: This case reinforced that unregistered brokers could face significant penalties for selling securities.

Steps to Ensure Compliance

If you are considering selling shares under Rule 506(b), it is crucial to ensure compliance with all relevant laws and regulations. Here are some steps to consider:

1. Consult a Legal Professional: Given the complexities involved, it is advisable to consult with a securities attorney to ensure compliance.
2. Register as a Broker: If you plan to act as a broker, ensure you are properly registered with the SEC and FINRA.
3. Understand Investor Requirements: Ensure that you are selling shares only to accredited investors or a limited number of sophisticated non-accredited investors.
4. Maintain Proper Documentation: Keep detailed records of all transactions and communications with investors.

Additional Resources

For more information, you can refer to the following resources:

• SEC’s Guide on Rule 506(b)
• FINRA’s Information on Broker-Dealers

When to Seek Legal Advice

Given the potential legal ramifications of acting as a non-registered broker, it is crucial to seek legal advice if you are unsure about your status or obligations. A qualified securities attorney can provide personalized guidance and help you navigate the complexities of securities laws.

Remember, this information is intended to provide a general understanding and should not be construed as specific legal advice. Always consult with a legal professional for advice tailored to your particular situation.