Issuing Securities?
Beware SEC Rule 3a4-1!

When issuing securities, navigating all SEC rules without risking regulatory intervention can be difficult and intimidating.

Tobin & Company has been managing securities offerings for 20 years and our clients who issue securities tell us that SEC Rule 3a4-1 causes them the most concern because of its broad broker definition and its seemingly ambiguous legalistic language.

In its simplest form the rule says that a salaried employee of a security issuer cannot sell a security more often than once in a 12-month period without being a licensed broker. If that happens the employee is at risk of breaking federal law.

And if a regulatory review reveals that one of your employees has sold a security offering more than once a year, in other words two separate offerings, without a broker license, that act (or two in this case) can lead to civil enforcement action, fines and other ancillary relief.

Rule 3a4-1, referred to as the “issuers’ exemption,” provides a non-exclusive safe harbor for employees of an issuer. However, the rule defines a “broker” very broadly and includes any person “engaged in the business of effecting transactions in securities for the account of others.” Merriam-Webster defines “effecting” as “to cause to come into being.”

Concern from issuers is that employees and officers of an issuer could be deemed “brokers” when they are assisting the issuer in the sale of its securities, even if they are not earning commissions, bonuses, or other contingent compensation. In simpler terms, unsuspecting salaried employees not deemed to be brokers can be at risk of breaking federal law when working on a firm’s offerings, while otherwise just doing routine tasks of their job.

The conflict arises when a company issuing more than one offering a year within a given parent entity, its employees and/or business owners, are at risk of having the federal government believe that they are a “broker” selling securities. In the United States an issuer can’t be a broker without being licensed through FINRA, and most issuers don’t want to own a broker-dealer or manage the FINRA licenses of their employees.

As a Managing Broker Dealer, Tobin & Company deals with Rule 3a4-1, FINRA and issuers of securities daily. We know how to protect issuers, issuer’s employees and fulfill all the obligations of a broker-dealer through the lens of securities law. If you don’t employ brokers and your employees are selling securities, our presence as your Managing Broker-Dealer protects them from regulatory actions.

If you’re planning to issue a new securities offering, call us. We’ll help reduce your Rule 3a4-1 stress!

Due Diligence

We conduct an investigation and perform due diligence and analysis with respect to the business and operations of the issuer. We document these for our own files as well as for the soliciting broker-dealers and for our regulators.

A Closer Look at Due Diligence

Offering Materials

We structure, prepare and/or review financial models and analysis, private placement memoranda, subscription documents, investor questionnaires, organizational documents and other documents pertaining to the securities offering by the issuer.

Broker-Dealer Agreements

We enter into soliciting broker-dealer agreements with brokers and broker-dealers willing and able to market and sell the securities of the issuer.

Documentation

We assist with the processing of all subscription documents, offering documents and other documents necessary for finalizing the sale of securities of the issuer.

Compliance

We ensure that our client’s offering complies with state and federal securities laws, where applicable, and that all filings that are required by regulators are completed and filed.

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