If you’re a Sponsor selling private placements, are you trying to figure out if you should engage a Managing Broker-Dealer (MBD)? Have you learned about the SEC’s Rule 3a4-1, but when you ask your attorneys what you should do to comply with US securities laws, they give you different answers? At TOBIN, we get it. We hear this concern often.
Non-correlated assets and the MBD
The private placements industry creates and sells alternative assets. When investors seek securities for their investment portfolios, they look to public equities, public bonds and alternative assets. Alternative assets are the burgeoning asset class of private securities that are not correlated to the public markets. This asset class is growing and is becoming more popular and increasingly common for investors in the United States.
Private placement issuers, and their sponsors, are the creators of these non-correlated securities in the US. Sponsors create these securities but sometimes aren’t sure that they should engage a Managing Broker-Dealer. Many issuers feel that Managing Broker Dealers (MBDs) are expensive and Sponsors sometimes feel that MBDs don’t add value nor stability to a private securities offering.
Allow me to change your mind
To my mind, your Managing Broker Dealer is like your friendly deputy sheriff in a small western Montana town in an episode of 1923, the prequel to the popular television series, Yellowstone. Just like in a young western town, in the nascent alternative assets marketplace, there are laws and rules that need to be followed. Our private securities ecosystem is small in contrast to the public securities marketplace and must care for itself to keep law and order and everyone out of trouble. That is why I liken our alternative assets marketplace to a western Montana town.
Taming the wild west
I like to think about the private securities industry like this: FINRA and the SEC are akin to the sheriff in that small, dusty town. They make the rules, such as Rule 3a4-1, and the rest of us must follow them. The Sponsor, as an issuer of private securities, must follow the rules, but there are so many of those rules and they are so complicated that it can be pretty tough to do. The investors who invest in private securities must also follow the sheriff’s rules. And the registered investment advisors (RIAs) and brokers who invest in and sell the private placements securities must all follow the rules as well. But getting the sheriff to talk to you about the rules, to interpret them so that you can get them right, is an impossibility.
This is when you rely on your deputy sheriff – the Managing Broker-Dealer.
Managing Broker Dealers in the United States are the deputy sheriffs of the private securities issuance market. We help all of the constituents follow the rules. We interpret the rules and we help the sponsors, the investors, and the sellers of the securities to follow the rules compliantly.
There are several Managing Broker Dealers in town, all reporting to the sheriff. MBDs like TOBIN cooperate with the other MBDS in the town, all helping each other and the town’s citizens to comply with the sheriff’s rules. MBDs gather throughout the year, sharing interpretations of the sheriff’s rules and sharing notes on how we work with our constituents to follow the rules, conduct optimal due diligence, and stay out of trouble.
Because Managing Broker-Dealers (deputy sheriffs) exist in the private placements market, the retail investor gets to invest in private securities (the visitor gets to order a drink at the bar). Brokers can safely sell private securities (the bartenders get to ply their trade). RIAs can safely introduce alternative investments into their clients’ portfolios (the hotel owners can safely house guests). We MBDs are engaged by the sponsors and issuers who create and sell the securities to enhance order in the market and help ensure that everyone in town is following the sheriff’s rules, which reduces risk and possible loss of capital, and creates a healthy, functioning marketplace.
With this system, developed in small western towns to create safety and order or, in our case, by the US Congress in creating the SEC and private industry in creating FINRA, the issuance of private securities and investment in the private placement industry can proceed safely.
Managing Broker–Dealers are the deputy sheriffs that you need
Managing Broker Dealers are the deputy sheriffs of your private placement offering. We are experts in securities law and in the nuances of FINRA regulations. We do the difficult and detailed work of engaging with everyone in the community to keep order and safety in the marketplace. We are the folks you can talk to when you are trying to figure out the law (like SEC Rule 3a4 1) and how to comply with it.
The MBD network is vast, yet small. Generally, all of the MBDs in the United States know each other. We are an intimate community and we have to stick together. Yes, we compete with each other. TOBIN may be the deputy sheriff in Helena, but WealthForge might be over in Billings and Cobalt might be over in Darby. We all have the towns we work in – and the issuers we work for – but we must all cooperate and support each other to help keep the order in the wild west of the alternative asset ecosystem.
MBDs aren’t always well loved, but we continue to do our work, shoring up professionalism and compliance in the non-correlated assets universe and ensuring that a high standard of product and conduct becomes the baseline.
Making the case for engaging with an MBD
So, yeah, sponsors may believe that Managing Broker-Dealers are expensive. That we are unpleasant and difficult. That MBDs are unnecessary. That MBDs make you follow a bunch of rules that you wouldn’t have to follow if you didn’t hire them. MBDs make you prove out every fact and statement in your PPM because FINRA’s due diligence requirements on the front end and back end of your offerings are pretty extensive and burdensome. MBDs will tell you things you don’t want to hear, like that you can’t make projections and that you can’t advertise an aggregated historical IRR.
But MBDs do this because we are the deputy sheriffs of the alternative asset universe. We are YOUR deputy sheriffs. We are here to help you, the town mayors, to comply with the securities laws that the sheriff established, and to keep an orderly town where folks feel safe and are willing to come in to visit or even to live. Or, in my metaphor… to invest in your securities.
Your Managing Broker Dealers are worth every penny. I assure you.