Issuer’s Principals Accountable for Third Party Sales Agents’ Failure to Register
The SEC instituted enforcement proceedings against several individuals alleged to have employed unregistered sales agents to sell shares in a company. The SEC asserts that the principals paid 5%-10% commissions to the sales agents to raise proceeds, recommend the securities, provide paperwork, and handle investor funds. The principals “participated in the unregistered sales agents’ solicitation” by entering into written agreements with them, supplying them with PPMs and other marketing materials, and paying them commissions. The SEC charges violations of the anti-fraud rules as well as the broker-dealer registration rules. The SEC also alleges that the offering should have been registered and that sales materials contained misleading statements. The SEC also charged the unregistered agents.
OUR TAKE: What’s interesting about this case is that the SEC seeks to hold the issuer and its principals accountable for the sales agents’ failure to register. How much due diligence should an issuer (or fund sponsor) conduct with respect to the regulatory standing of third party distributors?