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socrateaser
socrateaser, Attorney
Category: Business Law
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Experience:  Retired (mostly)
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This is a question about securities law. There is a company

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This is a question about securities law. There is a company we will call it Company A that is raising capital by selling Subordinated Debentures. Company B is comprised of two broker/dealers/FINRA approved etc. that contracted with Company A to sell these debentures by making "introductions" to investors and receiving their fees upon the closing of any investor they introduced to the company. Pretty straight forward so far. Now we want to form a Company C that will be comprised of accredited investors via a Regulation D offering to purchase these and other debentures in the same industry. If Company A and Company B come to an agreement that Company B will be the only entity through which you can acquire these debentures and that exclusivity is limited to one particular state, therefore Company C would buy these debentures through Company B with a transaction fee paid to Company B are there any securities law issues. I don't need to be told about conflicting interests in such transactions making them subject to extra scrutiny or anything like that. What I want to know is if there are any issues involving the federal securities laws. Specifically does the exclusivity agreement present problems and are there any other federal securities issues that will need to be dealt with?
Hello,

Title 17 C.F.R. 230.500(d) provides:

  • Regulation D is available only to the issuer of the securities and not to any affiliate of that issuer or to any other person for resales of the issuer's securities. Regulation D provides an exemption only for the transactions in which the securities are offered or sold by the issuer, not for the securities themselves.

 

Title 17 C.F.R. 230.501(b) provides:

 

  • An affiliate of, or person affiliated with, a specified person shall mean a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the person specified.

 

The issue here is whether or not Company B is an affiliate of Company A, rather than a broker-dealer. If an affiliate, then the contemplated transaction is unlawful.

 

Note: I'm not in a position to determine whether or not B is an affiliate of A. But, that's the issue of concern, because it raises the possibility of securities fraud -- which is what you're trying to avoid.

 

Hope this helps.

socrateaser and 2 other Business Law Specialists are ready to help you
Customer: replied 3 years ago.

What factors will determine whether or not B is an affiliate of A?

There are literally dozens of case law decisions -- none of which absolutely define the scope of the term "affiliate," for the purposes of this regulation. I think you can guess why: the government doesn't want to provide a clear path through which an issuer of a Regulation D security can fraudulently manipulate a buyer by creating a "strawman" broker-dealer to sell the issuer's securities.

The SEC definition of "affiliate" uses the term "control," which can mean a lot of things. The only absolute factor that I can provide is the obvious one: if the issuer A owns more than 50% of intermediary B, then B is an affiliate of A and the sales transaction is illegal. See, e.g., SECURITIES & EXCH. COM'N v. ADVANCE GROWTH CAPITAL CORP., 470 F.2d 40, 46 at fn. 7 (1972) ("Roselli-Monbrod Builders, as owner of 51% of Proviso's stock, is an affiliated person of an affiliated person of Advance Growth....").

The Advance Growth Capital decision is instructive, because the controlling interest was clouded by numerous business relationships, all of which ultimately provided ownership control to a single owner.

I realize you're looking for a clear path here. but the only clear path is for Company A and B to have no contractual agreements or ownership relationship concerning the sale of Company A's securities.

Hope this helps.


socrateaser and 2 other Business Law Specialists are ready to help you
Customer: replied 3 years ago.

Thanks for your help I gave you the biggest smile possible. What does you mean when you sort of practicing/retired? jpf

Means that if someone has very deep pockets, I might take a case. Otherwise, I'm not interested.

Best wishes.

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