The SEC’s Office of Compliance Inspections and Examinations’ exam priorities include issues arising from the continuing convergence of the broker-dealer and investment adviser professions.

Other OCIE priorities include registrants’ use of technology; applying its “presence exams” to investment advisers who have never been examined; and reviewing the JOBS Act.  Presence exams are risk-based reviews of private fund investment advisers that recently registered with the SEC.

OCIE has been very busy.

The SEC’s Division of Trading and Markets has issued guidance on the exemption from the broker-dealer registration found in Title II of the JOBS Act.

The JOBS Act directed the SEC to revise its rules to provide that the prohibition against general solicitation or general advertising will not apply to offers and sales of securities made pursuant to the Securities Act of 1933 Rule 506 so long as all of the purchasers are accredited investors.  Issuers must take reasonable steps to verify that purchases are accredited investors based upon methods established by the SEC.  The Staff advised that the exemption from broker-dealer registration in JOBS Act Section 4(b) does not require the SEC to issue or adopt any rules.  However, an issuer may not conduct a general solicitation of a Rule 506 offering on a trading platform until the SEC adopts rules to permit those activities. The SEC considers the exemption in JOBS Act Section 4(b) from the broker-dealer registration requirements to be fully operational and the exemption applies only to securities offered and sold under Rule 506 of Regulation D.  The Staff also believes that Congress intended to capture social media and Internet websites when it enacted JOBS Act Section 4(b)(1)(A), so they would qualify as a platform or mechanism that permits the offer, sale, purchase, or negotiation of securities, or permits it to engage in general solicitations or advertisements or similar activities by the issuers of the securities.

An associated person of an issuer of Rule 506 securities may rely on the JOBS Act Section 4(b) exemption to maintain a platform or mechanism for the issuer’s securities, assuming that the associated person otherwise qualifies for the exemption, including the condition prohibiting the receipt of any compensation in connection with the purchase or sale of securities. The SEC has previously noted that the persons, who market interests in a private fund, may be subject to the registration requirements of Securities Exchange Act of 1934 Section 15(a)(1).  The exemption in JOBS Act Section 4(b) does not, however, exempt persons from state registration requirements.

Thus, there is no blanket exemption from broker-dealer registration by way of the JOBS Act.

The SEC’S Office of Compliance Inspections and Examinations announced its examination priorities to highlight areas of “heightened risk” for registrants.  See

The OCIE also disclosed areas of emerging risks for registrants, as well as topics to consider the priorities.   Generally, these priorities apply to all registrants as well as specifically to OCIE’s investment adviser and broker-dealer examination programs.  The focus areas for investment advisors include:  safety of assets; conflicts of interest related to compensation arrangements and to allocation of investment opportunities; and marketing of performance.  Moreover, OCIE stated that, for investment advisers, money market mutual funds and compliance with exemptive orders will also be considered. 

For broker-dealers, the focus areas include: trading; capital; and weak anti-money laundering programs.  The policy topics for broker-dealers also include the forthcoming crowdfunding exemption under the JOBS Act.

In short, there is nothing new here, but it is worthy of repeating so as to be prepared.

The Securities and Exchange Commission’s Division of Trading and Markets assured two entities that, if they sought accredited investors for start-up companies they would not risk enforcement action by failing to register as broker-dealers under the Securities Exchange Act of 1934 Section 15(a)(1).  See FundersClub Inc. SEC No-Action Response, avail. 3/26/13.

In granting registration relief, the staff recognized the entities’ representations that:

  • the entities are advisers to venture capital funds;
  • The services include exercising any rights negotiated with the start-up company, providing the start-up with advice and networking assistance, voting investment fund shares, offering or selling its securities in the startup; deciding on any tender offers, and winding up the investment funds; 
  • the entities do not receive transaction-based compensation; 
  • the entities’ officers and employees do not receive transaction-based compensation;
  • any compensation to be paid to the entities is disclosed to investors in the fund at the time the interests are offered. 
  • no administrative fees are paid to the entities, or their affiliates or principals;
  • any portion of an administrative fee remaining in the custody account at the time a fund is wound up will be distributed to investors along with other fund’s and other assets; and
  • neither of the entities may withdraw any deposited funds from the custody account for its own use.

In short, it is all about transaction based compensation if you want to avoid registration.

The SEC’s Division of Corporation Finance will consider a bar on so-called “bad actors” from private offerings before announcing rules on crowdfunding under the JOBS Act.  However, we anticipate there will be an additional delay given the turnover at the SEC and the recent departure of its Corp Fin Director. 

As you have undoubtedly heard, the SEC has been criticized for delay in propounding these rules by various investor and industry groups.  The SEC is required by the JOBS Act to provide for an exemption for crowdfunding as well as disqualify those persons barred by a state authority from engaging in the securities business, convicted of a felony or misdemeanor relating to the sale of securities, or making false SEC statements.  To complicate matters, the SEC already has a pending Dodd-Frank Act rule to preclude certain “felons and bad actors” from participating in private offerings pursuant to Regulation D.  This proposed rule included certain events that occurred prior to the enactment of the Dodd-Frank Act.  Interestingly, when questioned about the delay, the SEC’s response was there were a lot of comments on this proposed rule. 

We expect that whenever the SEC finally gets around to approving final rules, the criticism and rancor should be deafening.

The SEC’s Division of Trading and Markets released guidance on the JOBS Act’s elimination of restrictions on analyst communication and research reports concerning initial public offerings of emerging growth companies.

The real quandary that the guidance addressed was related to the Elliot Spitzer settlement between regulators and major investment banks announced in 2003.  This settlement required strict firewalls between research and underwriting activities at certain major banks.  The SEC Staff clearly indicated that the JOBS Act “does not change” the settlement, thus requiring said signatories to obtain court approval to alter the pact.  If these signatories sought to change the pact, the SEC would then consider such an application, and respond accordingly.  However, the  SEC’s view at this point is that it has no authority to change this settlement with a rule. 

Essentially, the SEC has said nothing has changed with the JOBS Act, and, if investment banks want to take advantage of the JOBS Act provisions, they better be prepared for a Court fight from the SEC.

Despite some strenuous objections, the SEC agreed to propose a rule to lift the ban on general solicitation and advertising for certain private offerings as required by the JOBS Act.

The JOBS Act required to the SEC to allow Securities Act of 1933 Rule 506 issuers to broadly market their securities so long as the securities were purchased only by accredited investors, and to eliminate the advertising prohibition under Securities Act Rule 144A.  One issue left open by this rule proposal is that there is no specific verification method to determine accredited investor status.  The SEC believes such an approach would not be worthwhile since there are many ways to do so.  Issuers must instead take “reasonable steps” to determine such a status under the proposal.

Although the SEC proposed this rule sometime ago, no action has been taken. 

An intriguing phenomenon has occurred.  Regulators have recently noticed that there is a sharp rise in Internet crowd-funding sites. 

Ironically, the SEC still has not promulgated rules for allowing small businesses to raise capital online.  The SEC believes that those rules are months away.  Nonetheless, regulators estimate that there are almost 9,000 websites already dedicated to crowd-funding.

Regulators are deeply concerned that the proliferation of these sites could create more trouble for regulators, who are charged with enforcing thse rules and ensuring investor safety.

As my regular readers (hi mom!) know, I’ve spent a lot of time blogging about Crowdfunding under the JOBS Act.  They would also know that this equity-offering form of Crowdfunding is different from the crowdfunding used by Kickstarter and Indiegogo, where artists and inventors raise money from crowds of donors, rather than investors. 

A quick overview for the uninitiated:  artists, musicians, inventors and entrepreneurs all can use Kickstarter or Indiegogo to raise funds for a specific project: money to make a film, record an album, or bring a new product to market.  These projects are marketed to potential donors using engaging YouTube videos accompanied by written descriptions and a list of potential perks a donor will get based off of how much they give.  Usually, small amounts gets you a thanks and nothing more; larger amounts should get you something tangible (the to-be-recorded album, or the product); and even larger donations means you should get some special perks too (like a signed album, or even a private concert). 

Note how I said “should get”?  That’s because Kickstarter, the more famous of the two, has received some less-than-outstanding press lately.  Projects that have raised fantastic amounts – $10 million for a watchmaker, $600 thousand for a lightbulb – have failed to produce the promised products, angering the donors who expected something in return.

Kickstarter policy states that failed projects should refund money, but the website lacks any real mechanism to enforce that. 

Kickstarter has responded: not by creating a claw-back mechanism, but by changing the rules about how a project can be advertised.  In a blog post entitled “Kickstarter is not a store”  Fundraising projects for products and computer hardware now have stricter requirements on what they can say to potential backers.  This is all in an effort to temper expectations amongst these backers, who have unrealistic expectations of success.

Most notably, to me, is the new “Risks and Challenges” requirement, which will force the projects to explain the perils that lie ahead for their vision.  As Felix Salmon notes, bringing a product to market is a difficult process full of all sorts of unexpected pitfalls and problems. 

To me, this sounds a lot like the SEC’s requirements on issuers of securities, both public and private.  The SEC requires issuers to explain the risks facing the company.  Public companies have much larger risk disclosure requirements, but even a company making an offering under Reg D has to notify purchasers of the perils involved.

What’s next for Kickstarter?  The company clearly is looking to improve its market.  It’ll be fascinating to see what other rules they’ll place on their “issuers” to make Kickstarter more efficient.   


In a not so surprising development, the SEC announced that even SEC registered broker dealers may not act as a crowd funding intermediaries under the JOBS Act because the SEC has not adopted regulations. 

Crowd funding allows companies to finance new businesses by accepting and pooling donations of up to $1 million over the Internet if certain conditions are met.  However, the SEC has to adopt regulations governing these funding portals before allowing anyone to register with the SEC.  Currently, the SEC has not finished adopting those regulations. 

Accordingly, it is important to keep in mind that those wishing to engage in crowd funding should not engage in such activities until the SEC announces these regulations.