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Who is an Unregistered Broker,


What is a Broker?
Section 3(a)(4)(A) of the Exchange Act defines a broker
as a person engaged in the business of effecting
transactions in securities for the account of others.
SEC releases and no-action letters identify the factors
used to determine whether a person is required to register
as a broker.

What is Section 15(a)?

Section 15(a) of the Securities Exchange Act of 1934 (the
Exchange Act) makes it unlawful for a broker or
dealer to effect any transactions in, or to induce or
attempt to induce the purchase or sale of, any security
other than an exempted security unless such broker or
dealer is registered with the SEC. States have Also
Adopted laws regulating broker-dealer activity.

What Conduct Indicates Broker-Dealer


Receiving transaction-based compensation;

Regularly participating in the offer and sale of securities;
Assisting an issuer to structure securities transactions;
Identifying potential investors;
Soliciting securities transactions;
engaging in negotiations with investors;
Participating in order-taking in a securities offering; and
Previous securities registration and/or disciplinary actions.
Holding oneself out as a broker;

What is Transaction-Based Compensation?

Compensation contingent upon the success of the sale of
securities is the most important factor in determining broker
If transaction-based compensation is paid, the SEC will most
likely find other factors.

What Constitutes Significant Contacts with

Even in the absence of transaction-based compensation, there
are certain activities that could cause someone to be deemed
an unregistered broker, including:
Engaging in negotiations with the potential investors and the
Providing offering documents and marketing materials to
Making recommendations to potential investors regarding an
investment; and
Advising potential investors on the merits of an investment.

What Can Finders Do?

If a finder does not receive transaction-based compensation
and does not have significant contacts with investors, the
finder can engage in the following activities without
registration as a broker:
Assist the issuer in determining the terms of the offering;
Provide investor names and contact information to the issuer;
help prepare private placement memorandums and other
offering materials;
provide and prepare market and financial analyses and
feasibility studies;
advise issuer about potential financing and recommend
methods of financing; and
advise on the administrative work involved in a securities
Receive a fixed fee or hourly-based compensation that is
reasonably related to the services provided that is not
contingent upon an investment being made.

What is the Associated Persons Safe

Rule 3a4-1 of the Exchange Act provides a non-exclusive
safe harbor
broker-dealer registration
requirements for an associated person of the issuer.
An associated person is a natural person who is a partner,
officer, director, or employee of:
the issuer;
a corporate general partner of a limited partnership that is
an issuer;
a company or partnership that controls, is controlled by, or
is under common control with, the issuer; or
an investment adviser registered under the Investment
Advisers Act of 1940 to an investment company registered
under the Investment Company Act of 1940 which is the

How Does an Associated Person Qualify for

the Safe Harbor?
the individual must meet all three of the preliminary conditions
The individual must not be subject to a statutory disqualification;
The individual must not, at the time of his participation in the offer,
be an associated person of a broker or dealer; and
The associated person must not be compensated in connection with
the sale of the issuers securities by the payment of commissions or
other remuneration based either directly or indirectly on transactions
in securities. In determining whether payment of salary or a bonus
satisfies this standard, all of the facts and circumstances of the
compensation arrangement should be considered.

What Factors Determine if a Bonus

is Permissible?
Relevant factors in determining whether the payment of a
bonus is permissible include:


the offering commences and concludes;

the employees bonus is paid;
it is determined that the employees bonus will be paid;
associated persons are informed of the issuers intention to

pay a bonus; and

whether the bonus paid to a particular associated person varies
with their success in selling the issuers securities.

What Are the Additional Conditions

of the Safe Harbor?
to qualify for the safe harbor, the individual must also
meet one of the three conditions below:

Sales Restricted to Certain Classes of Purchasers or Certain

Transactions: This applies where sales of the issuers
securities are made in any one of the following four ways:
a) The sales are to a registered broker or dealer; a
registered investment company (or registered separate
account); an insurance company; a bank; a savings and
loan association; a trust company or similar institution
supervised by a state or federal banking authority; or a
trust for which a bank, a savings and loan association, a
trust company, or a registered investment adviser either
is the trustee or is authorized in writing to make
investment decisions.

b) The securities are exempted securities by reason of

section 3(a)(7), 3(a)(9) or 3(a)(10) of the Securities. These
exemptions include bankruptcy exchanges, issuer
exchanges, and court- or agency-supervised exchanges.
c) The sales are made pursuant to a plan or agreement
submitted for the vote or consent of the security holders
who will receive securities of the issuer in connection with
a reclassification of securities of the issuer, a merger or
consolidation or a similar plan of acquisition involving an
exchange of securities, or a transfer of assets of any other
person to the issuer in exchange for securities of the
d) The sales are made pursuant to a bonus, profit-sharing,
pension, retirement, thrift, savings, incentive, stock
purchase, stock ownership, stock appreciation, stock
option, dividend reinvestment or similar plan for
employees of an issuer or a subsidiary of the issuer.

Condition 2 to Safe Harbor

2. Duties Are Limited in Frequency and Proportion. Under
this exception, three conditions must be satisfied:

a) The associated person primarily performs or is intended

primarily to perform at the conclusion of the offering
substantial duties for or on behalf of the issuer otherwise in
connection with transactions in securities.
b) The associated person was not a broker or dealer, or an
associated person thereof, within the prior 12 months.
c) The associated person does not participate in selling a
securities offering more than once every 12 months other
than in reliance on the other two exceptions in 2(a) and (b)

Condition 3 to Safe Harbor

3. Passive Duties: This exception applies where the
associated person restricts his or her activities to any
one or more of several specified types of selling
activities, each of which is passive or restricted in
a) Preparing any written communication or delivering such
communication through the mails or other means that
does not involve oral solicitation by the associated person
of a potential purchaser; Provided, however, that the
content of such communication is approved by a partner,
officer or director of the issuer.
b) Responding to inquiries of a potential purchaser in a
communication initiated by the potential purchaser if the
content of such responses are limited to information
contained in a registration statement filed under the
Securities Act or other offering document.

Condition 3 to Safe Harbor Continued


Performing ministerial and clerical work in any transaction. An

issuer that permits unregistered directors, officers, employees
or other associated persons to participate in the offer or sale of
its securities outside the safe harbor afforded by Rule 3a4-1 is
at risk for the offering being subject to rescission by investors
whose purchases were induced by such unregistered persons.

For further information about the rules & regulations that

apply to investor relations activity, please contact
Brenda Hamilton, Securities Attorney at 101 Plaza Real S,
Suite 202 N, Boca Raton Florida, (561) 416-8956, or visit Please note that the prior
results discussed herein do not guarantee similar outcomes.
Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855

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