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The risks of using an unregistered platform


Guest post from Andrew Stephenson of CrowdCheck.

Looking to sell securities through an online platform? Using a platform that isn’t a registered broker-dealer may be fatal.

Since the general solicitation provisions for offerings to accredited investors of the JOBS Act went into effect, the online marketplace for alternative investments has expanded tremendously. However, there are some new platforms that have not properly registered as broker-dealers, become a registered representative of a broker, or qualified for any of the available exemptions from broker registration.

Section 15(a) of the Securities Exchange Act makes it unlawful for any person to act as a broker who is not registered. A securities broker is defined to be “any person engaged in the business of effecting transactions in securities for the account of others.” While certain activities, like executing a securities transaction for a client on a securities exchange clearly meets the standard of broker activities, other activities require a more nuanced analysis. That said, the SEC has made it clear that participating in important parts of a securities transaction, like soliciting investors, is broker activity. This can be a very complicated analysis and platforms should make sure they are following the advice of experienced securities counsel.

Why does this matter? A platform engaging in unregistered broker activities is subject to civil penalties and cease-and-desist orders. Also, as a result, companies issuing securities on unregistered platforms may find that issuance rescindable at the investor’s discretion. (In other words, the investors can make you give their money back.)

Section 29(b) of the Securities Exchange Act makes any agreement made in violation of the Act void. The language in the Section is broad enough that it would void the sale of securities that occurred as a result of the improper activities of the platform, allowing investors to rescind the sale of securities. And that is just at the Federal level. Many states have similar provisions that allow investors to rescind transactions in which an unregistered broker was involved.

In effect, startups who use an unregistered platform are allowing investors to place a “put” on their investments that may allow those investors to demand the return of their capital if they do not like how the company is progressing. This is not the type of risk that any company should take on.

Andrew Stephenson is the Director of Research Operations and Client Services for CrowdCheck. Andrew has a wealth of experience assisting broker-dealers and online funding platforms with objective due diligence on listed and promoted companies offering securities. 

The opinions of guest bloggers are their own and do not necessarily reflect those of SeedInvest or North Capital Private Securities Corporation.


This post was written by James Han on February 3, 2015

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