SEC Narrowly Construes JOBS Act BD Exemption
The SEC’s Division of Trading and Markets new FAQs on the broker-dealer exemption in the JOBS Act limits the use of trading platforms only to venture capital firms that co-invest in the traded securities. The JOBS Act exempts from broker-dealer registration “any platform or mechanism that permits the offer, sale, purchase, or negotiation of or with respect to securities, or permits general solicitation…” However, to take advantage of the exemption, the sponsor must not receive “compensation in connection with the purchase and sale of securities.” According to the FAQs, the staff will interpret “compensation” broadly to “include any direct or indirect economic benefit” and not just transaction-based compensation. However, profits associated with co-investment in the offered securities would be permissible. According to the staff, the “prohibition on compensation makes it unlikely that a person outside the venture capital area would be able to rely on the exemption.”
OUR TAKE: The staff has essentially gutted the exemption by broadly defining “compensation” to include any economic benefit including salary. It certainly appears that Congress meant to exclude only traditional transaction-based compensation and intended a much broader BD exemption so that third parties could provide platforms to allow Rule 506 issuers to solicit accredited investors.