International Society of Primerus Law Firms

Recent Developments for Unregistered Broker-Dealers

By K. Andrew Hall

Krass Monroe, P.A.

Minneapolis, MN

In my April article published in the Primerus BCI Newsletter, I presented some of the basic issues related to finders, unregistered broker/dealers that may be engaged in the business of effecting transactions in securities. Two new developments over the last several months have generated additional cause for concern for both finders and for M&A professionals.

SEC Enforcement Action against Finder

In a June Administrative Proceeding, the SEC accepted an offer of settlement from Ram Capital Resources, LLC and its principals related to an enforcement action by the SEC against them for willful violation of the broker-dealer registration provisions of Section 15 of the Securities and Exchange Act. Ram Capital was an intermediary in PIPE (private investments in public equity) transactions. Ram Capital located existing PIPE investments, pitched new PIPE offerings and solicited investors for these offerings. Ram Capital took a transaction based fee, which was paid by the investors, and took a percentage of warrants issued to the investors. The SEC found that Ram Capital negotiated and drafted the terms of the offering, identified and solicited investors, received compensation in the form of a percentage of the gross proceeds invested and advised issuers and investors as to the structure of the offering.

The most important point to take away from the SECs action is an indication that the SEC is stepping up enforcement of finder activity. This is not surprising, as the SEC has been giving indications for a number of years that it would do so. As other commentators have noted, the crucial factor in the action was the additional broker type activities negotiating, drafting and advising on the structure and documentation which, when added to the transaction based compensation, brought a finder into the realm of an unregistered broker-dealer. As noted in my April article, the general consensus among practitioners is that if a finder is only making introductions, it can receive transaction-based compensation. If, on the other hand, the finder is participating in the sales, negotiation or closing processes, broker activity is implicated.

New FINRA Classification for Investment Banking

As noted above, the SEC has warned that it will, and now has, stepped up enforcement of unregistered broker-dealers. In response to the SECs perception of this regulatory black hole, FINRA (f/k/a NASD) has adopted a new broker-dealer representative classification, and a new test, for a Limited Representative Investment Banking. The new Series 79 exam and qualification will enable unregistered private investment bankers (broadly, anyone providing M&A advisory services, private placements, underwriting, etc.) to become a limited representative of a registered broker-dealer for purposes of providing these services.

Therein lies the rub. While FINRAs attempt to enable unregistered investment bankers to become part of the current regulatory scheme, the limited representative license for private investment bankers cannot be held independently and likely will be inadequate for the purposes. Becoming a representative of a registered broker may not be as expensive and time consuming as registering as a broker, but there are still many hurdles. There is the question of locating a registered broker willing to add an independent limited representative. In addition, there is the question of the terms of the relationship between the broker and the representative from fee sharing to compliance issues.


At a time when access to capital for small and medium sized businesses is crucially important, the SECs and FINRAs actions have done little to improve the flow of capital. For our clients, the use of intermediaries can be crucial in getting a transaction done. FINRAs efforts are commendable, but they do not go far enough. If and when the SEC adopts rules for broker lite registration for private placement broker-dealers and M&A broker-dealers, we may see private capital markets loosen and provide our clients with the capital they need to grow and develop.

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The general information contained herein is intended for informational purposes only. It is not intended to be, and should not be construed as, legal advice or legal opinion on any specific facts or circumstances.

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