McBride for Business Blog

Unlicensed Brokers

June 16, 2017 // R. Shawn McBride // No Comments »

Unfortunately, it’s a problem we’ve seen for a long time. There are some people out there that are acting as brokers, specifically securities brokers, who don’t have a license to do so, and they’re attempting to get involved in transactions. The SEC and states have made it clear that they wish to regulate the activities of brokers. They want them to be licensed. They want them to take certain exams, and they want to make sure that they’re doing certain quality control things on the back end to be involved in securities transactions. Compliance is expensive and burdensome. People don’t want to be licensed as securities brokers.

Now, business brokers are a different matter. Typically, if all of the assets of the business are being sold, then there is an applicable exemption available that keeps those people from being involved in the regulation of securities broker. However, if what’s being sold is part ownership of the business, also known as security, then we don’t have the same exemptions available. Typically, these transactions are to be regulated.

Some of the tests the SEC looks at in determining whether somebody is a broker or not is whether their fee is fixed or based on the amount of money raised, whether they have other activities going on beyond solely raising money. Are they providing other services to the business? And is their compensation tied to the success or failure of the money being raised?

Unfortunately, we see many transactions where people want to be paid if money is raised, and not paid if money isn’t raised. This is attractive from the business owner’s perspective because they don’t have to worry about such things. They can have somebody attempt to raise money, and if they fail, they don’t have to pay them. The business owner thinks they’re getting a good deal, but if that unlicensed broker ends up in trouble with the securities authorities, the business owner could end up in trouble, too. They could be considered to be aiding and abetting the securities law violation, and a company could be tainted for future investors. It’s a bad deal.

The key here is to tread carefully. Make sure you get a securities lawyer that you trust involved early in the process. Have them look into the overall process. Make sure the compensation structure works in light of the licenses that are there. In some cases, you may have to walk away from the siren calls of easy money provided by that unlicensed broker, because if they’re getting paid as a broker and acting as a broker, you as a business don’t want to be involved with assisting them in their illegal activities.

What’s been your experience? Have you been approached by unlicensed brokers? Join us in the comments below and let us know.

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This posting is intended to be a tool to familiarize readers with some of the issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances. Each case is unique.  Past results do not guarantee future outcomes. This article should not be treated as legal advice to any person or entity. Camila Schnaibel.


About the Author

R. Shawn McBride is the Chief Innovation Officer at McBride For Business, LLC. His signature keynote, The 3 Laws of Empowerment, gives audiences an entertaining look at how they can prepare, plan and protect themselves. You can email R. Shawn McBride or (214) 418-0258.


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