The staff of the SEC’s Division of Trading and Markets (the “Staff”) denied a request for no-action assurances regarding the broker-dealer registration requirements of the Securities Exchange Act of 1934 made by a firm that proposed to provide a company with introductions to potential sources of financing in return for compensation based on the gross amount of funding raised by the company as a result of the introductions. The firm indicated that its role would solely involve introducing the company to a limited number of the firm’s contacts who may have an interest in providing financing; the firm represented that it would not (1) engage in any negotiations on behalf of the company or any contacts it provided; (2) provide any contact with any information about the company that might be used as the basis for any negotiations regarding financing to be provided to the company; (3) have any responsibility for, or make any recommendations concerning the terms, conditions, or provisions of any agreement between the company and any contact that provided financing to the company; and (4) provide any assistance to any contact or the company with respect to any financing transactions.
In its response, the Staff observed that receipt of transaction-based compensation in connection with effecting transactions in securities, or inducing or attempting to induce the purchase or sale of securities is a hallmark of broker-dealer activity requiring registration with the SEC as a broker-dealer. The Staff went on to state that the fact that the firm would be introducing the company only to persons with a potential interest in investing in the company’s securities implied that the firm “anticipates both ‘pre-screening’ potential investors to determine their eligibility to purchase the securities, and ‘pre-selling’ [the company’s] securities to gauge the investors’ interest.” The Staff further observed that because the firm would be compensated based on whether its introductions led to investments in the company’s securities, and therefore would be transaction-based compensation, the firm would have a “salesman’s stake” in the proposed transactions, creating a heightened incentive for the firm to engage in sales efforts. On this basis, the Staff concluded that the firm’s proposed activities would require broker-dealer registration, and declined to grant no-action relief.