/>iStraightPath Venture Partners, LLC and PMAC Consulting have recently reached settlements with the US Securities and Exchange Commission (SEC) following SEC enforcement actions against them.
More specifically, the SEC alleged that StraightPath and PMAC engaged in unregistered “broker” activity under the Securities Exchange Act of 1934 (34 Act), i.e., brokered transactions without first satisfying the corresponding registration requirements thereunder. The settlements will cost these firms hundreds of thousands in civil penalties and millions in settlement fees.
These actions highlight the SEC’s continued focus on holding unregistered broker-dealers accountable, and serves as a crucial reminder that those involved in the buying and selling of securities should carefully consider their broker-dealer status before engaging in what could be viewed as broker activity, as well as the status of third parties with whom they do business.
Broker Dealer Registration Requirements
Who Needs to Register?
Under the 34 Act, those engaging in the regular business of buying and selling securities, whether for their own account or others, is considered a “Broker” or “Dealer” and must abide by the regulations imposed under the 34 Act. Among those requirements, broker-dealers must register by filing and regularly updating Form BD, join a self-regulating organization, and file a Form U-4 for any “associated person.” The 34 Act defines an “associated person” broadly, to include anyone who is a manager, director, part owner, or employee of a broker-dealer whose work is not purely clerical. It also includes anyone with whom a broker dealer has common control. The Investment Advisers Act of 1940 contains similar regulations for investment advisors, including criteria for determining who qualifies as an “associated person.”
Broker-Dealer or Finder?
Some third-party arrangements may trigger broker-dealer status under the 34 Act. For example, private equity funds may wish to pay a fee to “finders” or “business brokers” who connect an investor, but if the fee recipient is not registered as a broker-dealer, the SEC may regard this as unregistered broker-dealer activity. The SEC considers several factors when making this assessment, including (1) whether the fee is contingent on investment, (2) whether the fee increases relative to the size of the investment, and (3) the timing of when the finder is engaged in broker dealer activity. The SEC also will evaluate whether the individual participated in solicitation, negotiation, or execution of the transaction.
StraightPath Settlements
In a January 14 order describing the terms of the settlement, the SEC stated that three principals of VCP Financial LLC acted as unregistered brokers when they sold membership interests in limited liability companies claiming to invest in pre-initial public offerings (IPO). Specifically, the order stated that the principals solicited investors in StraightPath, a company offering membership interests in private companies which could later become public.
The SEC alleged that due to the transaction-based compensation received by each principal, they provided brokerage services in violation of Section 15(a) of the 34 Act. Further, the SEC alleged that VCP failed to appropriately manage a conflict of interest when it required clients to disclaim VCP’s role as an investment advisor, which was inconsistent with the firm’s marketing materials and in violation of Section 206(2) of the Advisers Act.
The SEC previously charged StraightPath with fraud in 2022 in an unrelated case where the SEC alleged that StraightPath deceived investors about the fees it collected and sold shares in pre-IPO companies that StraightPath did not own. The SEC alleged in its complaint that two of the founders of the brokerage firm engaged in brokerage activities despite being barred from the brokerage industry.
The three principals accused of unregistered broker-dealer activity paid disgorgement of transaction-based compensation received from of the alleged activity totaling over $345,000 and civil penalties totaling $100,000. VCP also paid a civil penalty of $100,000.
PMAC Consulting Settlement
In a similar settlement, the SEC charged PMAC Consulting and its owner with engaging in unregistered broker activity despite an agreement barring the PMAC’s broker dealer activity after an unrelated 2016 investigation. The SEC stated that despite this ban, the owner transferred clients from a previous organization and told them that “nothing would change as far as business goes.”Without admitting or denying the findings of the order, the owner and firm agreed on a settlement that included industry and penny stock bars, and a civil penalty of $3 million.
Takeaways
Despite the recent appointment of SEC Chair Mark T. Uyeda and changes in the White House, the SEC has maintained laser focus on fraud prevention and enforcement of unregistered broker-dealer regulations. Accordingly, unregistered broker-dealers are well advised to remain hypervigilant with respect to engaging in activities that could necessitate registration as a broker-dealer under the 34 Act.
In addition, individuals and entities involved in the buying and selling of securities, including those seeking to raise capital, will need to be cautious about engaging with third parties that buy and sell securities.
