Client Alert: JOBS Act Exempts Operators of Online and Similar Platforms from Broker-Dealer Registration Requirements



The Jumpstart Our Business Startups Act (the “JOBS Act”), signed by President Obama on April 5, 2012, contains several provisions intended to make it easier for start-up and emerging companies to raise capital by issuing their securities. Perhaps the most anticipated change is the one that will permit these business to raise capital by means of “crowdfunding.”

Broker-Dealer Exemption From Registration.

One other provision of the JOBS Act, which perhaps has been lost in the excitement over crowdfunding, is a provision that will allow intermediaries to assist companies with their capital-raising efforts without being required to register with the SEC as “brokers” or “dealers.” Moreover, these intermediaries will be able to maintain a “platform or mechanism” to permit securities offers, sales, purchases, and negotiations and general solicitations and general advertisements by issuers. The intermediaries will also be permitted co-invest the in the issuer’s securities. They may not, however, receive compensation in connection with the purchases or sales of securities and may not hold investor funds or securities.

The new exemption provision, found in Section 201(c) of the JOBS Act, does not require the SEC to adopt rules to implement its purpose and is, therefore, available now for platforms that adhere to the statute’s requirements and limitations. Some questions remain, however, about the operations of the intermediaries, as discussed below, and the intermediaries may not provide the full suite of services traditionally offered by registered brokers and dealers. The intermediaries must restrict their activities and meet certain other conditions in order to qualify for the Section 201(c) exemption, as described in this Securities and Corporate Finance Alert. Nonetheless, Section 201(c) promises to open up the capital-raising process significantly in ways not permitted prior to its enactment.

Offers and Sales Limited to Rule 506.

The exemption from the broker-dealer registration requirement is limited to offers and sales conducted under Rule 506 adopted by the SEC. Under Rule 506, a business may issue and sell an unlimited dollar amount of its securities if it restricts the purchasers to “accredited investors” and to no more than 35 non-accredited investors (or the issuer reasonably believes that there are no more than 35 non-accredited investors) in a single offering. The term “accredited investor” includes a long list of certain business entities and institutions, as well as well-heeled individuals. Non-accredited investors must also, either alone or with the aid of an independent representative, meet certain (unspecified) sophistication requirements. Finally, Rule 506 offers and sales currently cannot be made “by any form of general solicitation or general advertising.” This restriction on Rule 506 offers and sales has been eliminated by separate, neighboring sections of the JOBS Act for sales to accredited investors only, but one of those neighboring sections requires the SEC to adopt new rules to permit general solicitation or general advertising. As of the date of this Alert, those rules have not been adopted. See our earlier Securities and Corporate Finance Alert containing more information about the required revision of Rule 506 here.

Limited Activities.

Section 201(c) provides that, with respect to securities offerings that comply with Rule 506, no person who meets the conditions described below under “Conditions to be Met” would have to register with the SEC as a broker or dealer solely because:

(a) that person maintains a “platform or mechanism” for the offer, sale, purchase, or negotiation of or with respect to securities, or that permits general solicitations, general advertisements, or similar activities by the issuers of those securities;

(b) that person or any associated person co-invests in the securities; or

(c) that person or any associated person provides “ancillary services” with respect to the securities.

Ancillary Services Permitted.

The “ancillary services” that are permitted include:

(a) due diligence services (as long as those services do not include, for separate compensation, investment advice or recommendations to issuers of securities or investors); and

(b) the provision of standardized documents to issuers and investors (as long as the person or entity does not negotiate the terms of the issuance of securities and as long as issuers are not required to use the standardized documents as a condition of using the person’s service).

Conditions to be Met.

In order to qualify for the exemption from registering as a broker, the person providing the services described above must also meet the following conditions:

(a) That person (and any associated person) may not receive any compensation “in connection with” the purchase or sale of the securities;

(b) That person and each associated person may not have possession of customer funds or securities in connection with the purchase or sale of the securities; and

(c) That person and each associated person may not be subject to certain disqualifications for certain specified securities or commodities law violations.


The broker-dealer registration exemption described above permits activities similar to those that have been conducted by “angel platforms” or similar web-based or social network-based services that match start-up companies seeking capital with potential investors. Those services traditionally have operated under existing SEC informal guidance as to their activities, although that informal guidance has not been crystal clear. Moreover, the new JOBS Act exemption leaves some questions still unanswered.

Although a platform or mechanism can permit general solicitations, general advertisements, and similar activities by issuers, the statute does not state whether the operators of those platforms must wait until the SEC adopts the mandated changes to Rule 506 discussed above and in our earlier Securities and Corporate Finance Alert.

As noted above, the platform operators may not receive any compensation in connection with the purchase or sale of the securities for which it acts as an intermediary. (Transaction-based compensation has been a hallmark of the SEC’s interpretation of what it means to be a “broker” under federal securities laws.) This raises the obvious question as to how a platform’s operator would be compensated for providing its services. Intermediaries are permitted to provide due diligence services and standardized documents, subject to the restrictions described above, but it is not clear, in the business sense, whether the compensation permitted for such services would be worth the expense of maintaining the platform. Intermediaries are also permitted co-invest in the securities being offered on their platforms, but such co-investing may subject them to other regulations, such as those that govern investment advisors or investment companies. In addition, the compensation typically earned by investment companies may exceed the compensation typically paid to a broker for helping a company raise capital.

It also must be noted that Section 201(c) exempts platform operators only from registration under federal securities laws and rules. Each state has its own laws and rules that may require brokers to register with those states, and the JOBS Act does not pre-empt state laws requiring broker registration. Accordingly, operators of angel platforms and persons considering organizing such platforms will need to address state compliance matters prior to commencing operations.

The information contained in this Article is for information purposes only and does not constitute legal advice for any specific situation. For more information about the subject matter of this Article, please feel free to contact Jeffrey A. Bartholomew at Robinson Waters & O’Dorisio at 303.297.2600. The invitation to contact us is not intended as a solicitation in any jurisdiction in which we are not licensed to practice law.

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