Regulation D, or Reg D as it’s commonly called, can be a benefit or a curse depending on who is relying on it and if that party understands the nuances. Under Reg D, you will find a number of separate Rules which provide definitions of various terms, such as accredited investor; a description of a variety of offerings and the requirements or restrictions for each; and notices to be filed. Understanding the nuances of Reg D is important, since running afoul of the requirements or restrictions could place an issuer in peril of having to register their offerings.

Once the issuer has determined that it may rely on Reg D, the next question becomes whether it can market the offering, or if doing so would require registration or association with a FINRA member broker-dealer.

Section 3(a)(4)(A) of the Securities Exchange Act of 1934 outlines the requirements to register as a broker. In general, the term “broker” means any person engaged in the business of effecting transactions in securities for the account of others.  When determining activities to be used to market its offering, the issuer must consider the following questions:

  1. Will the issuer or its staff participate in important parts of a securities transaction, including solicitation of potential investors or negotiation of the transaction?
  2. Is the compensation that the issuer or its staff will receive for participation in the transaction dependent upon, or related to, the outcome or size of the transaction?
    • Will the issuer or its staff receive trailing commissions, or any other transaction-related compensation be received?
  3. Is the issuer or its staff otherwise engaged in the business of effecting or facilitating securities transactions?
  4. Will the issuer or its staff handle the securities or funds of others in connection with securities transactions?

If the issuer can answer yes to any of these questions, then the issuer may need to be registered as a broker in conducting the offering. But wait…can’t an issuer seek out investors without being registered?  The answer may be yes; however, this will depend upon other activities being undertaken and how compensation is being earned or paid to those conducting the solicitations.

Generally, when an issuer has staff that will market the offering or solicit investors, the SEC will look at factors such as staff compensation and duties with the issuer. Let’s look at the following example:

Issuer A is going to offer a new fund. It is going to rely on its current marketing team to develop materials and reach out to investors of a prior fund offering to gauge their interest in the new fund. The staff is all salaried and will not receive any additional compensation related to the offering.

In this example, registration as a broker may not be required. However, issuers should always verify their ability to rely on Reg D with a qualified securities attorney before embarking on any fund offering or solicitation to intermediaries or prospective investors.

Now let’s change the facts slightly:

Issuer A has decided that in addition to salaries, it will pay the marketing staff a bonus equal to 10% of investments in the fundraised by the staff member.

We now have a transaction-based compensation model. Since compensation is generally considered to be a triggering factor under Rule 3(a)(4)(A), the issuer will likely have to register as a broker to conduct its offering.

Now consider a third variation to our scenario:

Issuer A hires sales and marketing specialists who are solely responsible for marketing this new offering and soliciting potential investors. They will be paid a salary with a discretionary bonus based on their performance and will be either retained to market the next offering or let go, depending on their performance.

This one is a little trickier, but let’s look at the facts.

  1. First, the new hires have no other roles at the issuer; they have been hired only to market the offering and solicit investors;
  2. Second, the compensation includes a bonus based on performance. Given their duties, we should assume that some of that bonus could be determined by the funds raised from investors; and
  3. Third, their continued employment is based on performance.

Given these facts, it appears that the new sales and marketing specialists may be brokers and that this situation would likely trigger registration with a FINRA member broker-dealer. Of course, the issuer must seek guidance from counsel before proceeding.

The determination of whether an issuer may rely on an exemption, may be required to register as a broker, or should hire personnel to market and solicit a fund can be confusing.  As noted in the scenarios above, this determination depends on a number of factors. Seeking guidance from qualified securities counsel can certainly make the process easier and will also avoid making the wrong decision, which could have detrimental consequences including, but not limited to, the rescission of investor monies.




This article is not a solicitation of any investment product or service to any person or entity. The content contained in this article is for informational use only and is not intended to be and is not a substitute for professional financial, tax or legal advice.


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This article is not a solicitation of any investment product or service to any person or entity.
The content contained in this article is for informational use only and is not intended to be and is not a substitute for professional financial, tax or legal advice.