On 14 January 2025, the Securities and Exchange Commission (SEC) announced settled charges against three investment adviser representatives for acting as unregistered brokers in the sale of membership interests in certain limited liability companies (i.e., Funds) that each purportedly owned shares of private issuers that had prospects of becoming publicly traded. The SEC separately announced settled charges against an advisory firm in a related action involving improperly managing conflicts of interests and the use of liability waivers.

The settled charges against investment adviser representatives highlight the SEC’s continued drive to hold unregistered brokers accountable – especially those who facilitate the sale of pre-IPO investments to retail investors. Recently, in September 2024, the SEC had settled charges against various market participants for unregistered broker activity.

The individuals subject to the SEC’s orders were investment adviser representatives but, according to the orders, had provided investors with marketing materials and advised investors on the supposed merits of the investments. Although the individuals were each affiliated with a registered investment adviser, the SEC alleged that their actions constituted brokerage services distinct from investment advisory services. Among other facts, most investors were not pre-existing investment advisory clients. In addition, the adviser did not charge a management fee for the value of the investments into the Funds. Instead, the individuals received transaction-based compensation.

The SEC charged all three individuals with failures to register as brokers and provided for nearly US$540,000 in collective disgorgement, prejudgment interest, and civil penalties.