Accessing US capital and facilitating investment banking transactions



Micah A. Taylor for Institute of Compliance

Accessing US Capital private fund managers or sourcing investors in merger and acquisition transactions requires an understanding of US securities laws and rules in order to minimize regulatory risk. This article will attempt in brief, to summarize the options available.

Raising Capital for Private Funds and Investment banking activity are one and the same under US regulations. When you seek fund investors or seek investors in a private company, you are essentially engaging in what is known as a “Private Placement” of securities (as opposed to a “Public Offering”). The term “Private Placement” means a nonpublic offering of securities conducted in reliance on an available exemption from registration under the Securities Act. The Financial Industry Regulatory Authority (FINRA) which in the US is tasked to license and oversee Broker Dealers, defines “Investment banking” services “to include, without limitation, acting as an underwriter, participating in a selling group in an offering for the issuer or otherwise acting in furtherance of a public offering of the issuer; acting as a financial adviser in a merger or acquisition; providing venture capital or equity lines of credit or serving as placement agent for the issuer or otherwise acting in furtherance of a private offering of the issuer”.

FINRA requires a person to pass the Series 79 [Limited Representative – Investment Banking (Investment Banking Representative)] qualification examination if such person’s activities involve: (1) advising on or facilitating debt or equity securities offerings through a private placement or a public offering, including, but not limited to, origination, underwriting, marketing, structuring, syndication, and pricing of such securities and managing the allocation and stabilization activities of such offerings, or (2) advising on or facilitating mergers and acquisitions, tender offers, financial restructurings, asset sales, divestitures or other corporate reorganizations or business combination transactions, including but not limited to rendering a fairness, solvency or similar opinion.

The Securities Exchange Act of 1934 defines a broker as “any person engaged in the business of effecting transactions in securities for the account of others,” and makes it unlawful for a “broker” to “effect any transactions in, or attempt to induce the purchase and sale of, any security” unless properly registered as a broker-dealer. Thus, the prohibition on unregistered broker-dealer activities not only extends to actual sales or purchases of securities, but also to solicitations for purchases or sales of securities. To determine whether a person is “engaging in the business of” or “effecting transactions in” securities for the account of others, the SEC and courts look to a variety of factors, including whether the person:

  • works as an employee of the issuer;
  • receives a “commission” or a salary;
  • sells or earlier sold securities of other issuers;
  • participates in negotiations to a material extent between the issuer and an investor;
  • provides either advice or an evaluation as to the merit of the investment or provides a valuation of the investment; and
  • actively (rather than passively) finds investors.

Raising Capital for Private Funds requires the consideration as to whether fundraising activities and desired compensation structure require the marketer to be registered as a broker-dealer with the SEC and FINRA. In addition, the Fund Manager will need to evaluate its own internal marketing and fundraising practices as well as how it compensates those of its employees who engage in marketing and fundraising activities for the Fund to determine whether these activities and compensation practices require the individual marketers and the fund manager itself to be registered as a broker-dealer. Similarly, the individual engaged in soliciting investments in private funds must determine if its receipt of their fee from the fund manager causes them to be looked upon as a “broker”.


There are a few options for those seeking to raise capital for private funds or wish to solicit US persons on a M&A transaction. Some options will serve to avoid the US Broker Dealer registration issue in total should the activity satisfy the requirements for the exemption.

Option 1: Create a Broker Dealer

Register as a Broker Dealer with FINRA and the SEC with a business line of “Private Placements”. FINRA reviews all applications out of District 10 in New York and has 180 days to make a decision. There is also an option for Fast Track review if the application qualifies where the Broker Dealer registration will be approved within 8 weeks. The process is document intensive and requires two (2) Principals who have passed the Series 24 (General Principal) qualification exam (unless the applicant is approved for a single Principal waiver). One of the Principals mentioned must also have passed the Series 79 (Limited Representative – Investment Banking) in order to supervise the investment banking / private placement business.

Option 2: Associate with a Broker Dealer

Register the individual who is to engage in the capital raising activity with a US Broker Dealer. Naturally the individual would have to pass the Series 79.  The Broker Dealer becomes responsible for the activities of the associated person and the transaction itself. The Broker Dealer would be considered to be making a recommendation to an investor through the associated person, as such the Broker Dealer is under a duty to conduct a reasonable investigation concerning that security and the issuer’s representations about it. Failure to comply with this duty can constitute a violation of the antifraud provisions of the federal securities laws and, particularly, Section 17(a) of the Securities Act, Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. It also can constitute a violation of FINRA Rule 2010, requiring adherence to just and equitable principles of trade, and FINRA Rule 2020, prohibiting manipulative and fraudulent devices. The Broker Dealer would have to appear in all contractual and marketing materials as the Broker of record and is expected to perform all the due diligence, AML and suitability functions required as if the deal belonged to it, which in the eyes of the US regulators, it does. Any compensation to be paid to the associated person must be paid through the Broker Dealer.

Option 3 – Chaperoned by a Broker Dealer

Enter into a Chaperoning Agreement under SEC Rule 15a-6 with a US Broker Dealer. Rule 15a-6 is a “safe harbor” that permits non-US Broker-Dealers to conduct certain regulated activities in the United States with US persons without SEC registration or affiliation with an SEC-registered broker-dealer. In order to take advantage of this the foreign broker would have to find a US Broker Dealer that is authorized to engage in the 15a-6 business. The 15a-6 exemption is very narrow in its application. For example, only Institutional and Major Institutional investors may be approached (solicited). A “Major US institutional investor” is an entity (i) that either is a “US institutional investor” or a SEC-registered investment adviser, and (ii) that owns or has under management at least $100 million. There are other limitations of note which one would need to consider, such as number of chaperoned and unchaperoned physical visits and communications, requirements of the designated foreign associated persons, disclosures, and documentation to name a few. Rule 15a-6 was not originally designed to be used in private placement and Investment banking transactions, instead it was designed to facilitate securities trading in the secondary market but the SEC in the Roland Berger 2013 No Action letter allowed the exemption to be used in investment banking transactions in particular an M&A transaction with additional restrictions.

Option 4 – The Issue Exemption

Exchange Act Rule 3a4-1 provides a non-exclusive safe harbor, which allows associated persons of the issuer of securities to participate in sales of the securities without being deemed to be a Broker Dealer. However, among other things, the issuer exemption is not available to firms, including private fund advisers or their affiliates, whose personnel are compensated in connection with their participation in the securities transaction through the payment of commissions or other remuneration based either directly or indirectly on transactions in securities. Fund managers find it difficult to fit into this exemption because of the strict limitations. Even with respect to associated persons that do not receive transaction-based compensation, in order to be covered by the issuer exemption, private fund managers must satisfy one of three conditions: (1) Personnel must limit their participation to transactions involving the offering and selling of the issuer’s securities only to broker-dealers and other specified types of financial institutions; (2) Personnel must perform substantial duties for the issuer other than those in connection with transactions in securities, must not have been a broker-dealer or an associated person of a broker-dealer within the preceding 12 months, and must not participate in selling an offering of securities for any issuer more than once every 12 months; or (3) Personnel must limit their activities to delivering written communication by means that do not involve oral solicitation by the associated person of a potential purchaser.

Option 5: M&A Broker Exemption

Pursuant to a 2014 SEC no-action letter, a financial intermediary that limits its business activity to advising privately held companies in M&A transactions need not register as a Broker Dealer. The no-action letter states that the SEC’s Division of Trading and Markets will not recommend enforcement action to compel registration by brokers who limit their securities activity to assisting in transactions which result in the transfer of ownership of privately-held companies (“M&A Brokers”). The transfer of ownership may be accomplished by any number of means, including a stock sale, merger, issuance of new shares or other business combination. However, the transaction must result in the acquirer obtaining control and actively operating the target company. There is no limitation on the size of the transactions or the target companies. Control is presumed if the buyer “has the right to vote 25% or more of a class of voting securities.” As long as these conditions are met, unregistered brokers may; (1) represent both buyers and sellers of private companies, (2) advertise the business, negotiate the transaction, and (3) receive transaction-based compensation without any limitation as to the size of the transaction.

Raising capital in the US or engaging in M&A transactions in the US can at times appear daunting, but the correct approach to take is to determine if your transactional expectations match up with any of the options and structure your US activity accordingly.

Micah A. Taylor is the co-founder of Taylor & Gray LLC a financial services regulatory consulting firm located in New York. Taylor & Gray advises, Investment Advisers, Broker Dealers and Commodity/ Futures trading firms in the US and globally. Company information can be located at Taylor & Gray LLC is the parent company of T&G Private Capital LLC a registered U.S. Broker-Dealer that provides compliance oversight and documentation for private Investment Banking transactions. Company information can be viewed at For more information, please call Micah Taylor at 212.588.8906 or email [email protected].

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