Issuer Exemption Pitfalls

by Andrew Szabó CFA, Chief Compliance Officer at Brokerage Services, LLC.

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of

To raise capital in the market, the 1933 Act requires that a company issuing non-exempt securities must:

  •  qualify for an issuer exemption, or
  • employ a licensed broker-dealer, or
  • register itself in each state as a securities dealer.

Frankly, however, many issuers blunder, thinking they can employ the issuer exemption, while falling outside of it and leaving themselves at profound risk. This is especially common in the real estate field but is not limited to it. Let’s look more deeply at this problem.

Who gets to use the issuer exemption?

The issuer exemption was meant to provide a safe harbor for employees or directors of the issuer, so that small businesses could raise money more easily and inexpensively. This safe harbor would allow the issuer to avoid registering as a broker-dealer, as they are acting on behalf of their company, not buying and remarketing the securities of a third party.

Does state law create any perils in relying on the issuer exemption?

Yes, there are perils in part stemming from the patchwork of state regulations. In Maryland, New York, and Texas, for example, if you use any form of General Solicitation, then you lose the issuer exemption.

Must issuers follow the same state and federal regulations as a licensed broker-deal in relying upon the Issuer Exemption?

Absolutely. Such rules apply to such matters as accreditation, investor communications, document retention, escrow accounts, risk disclosure, conflicts of interest, related party transactions, Rule 10b-5, “forward-looking statements” and state registration, among others.

What about the use of finders–that’s not a problem, is it?

It can be a big problem. If any part of a finder’s compensation is geared to success in raising capital, or to a formula (such as one related to transaction size), that finder must be licensed in the securities business and affiliated with, and compensated through, a broker-dealer. If not, the issuer, the issue itself, and the finder are all at legal peril. The use of such finders is not always detected by regulators upon issuance, but this delict may well be discovered and pursued by plaintiffs or prosecutors if problems develop later with a deal.

Under the Issuer Exemption, is the Issuer subject to examination by the SEC and by state securities authorities?

Yes. And because many issuers lack sophisticated tools to preserve information about investment material distribution, including content, versions, who read the materials and exact timing, it may be difficult or impossible for such issuers to evidence important aspects of the capital-raising process.

Are there other dangers in relying upon the Issuer Exemption?

Yes, the SEC has ruled that if certain employees or officers of the issuer are paid chiefly to sell securities and have few other duties, they may be deemed “brokers” under law. Further, for issuers who bring more than one issue in any single year, there are strict regulations under the Issuer Exemption.

Is the platform a marketing and compliance panacea?

No, of course not. What we at do claim is a broad-ranging set of solutions that can be customized (with the help of our skilled staff) to meet a wide range of marketing and compliance needs. We also claim that our solutions dovetail well with, and greatly facilitate, the work of financial operations, compliance, legal and accounting professionals, whose services remain essential. However, with our tools, issuers may find that that they are spending less on routine compliance tasks, relying instead on these professionals for more complex judgments.

This publication is a service to our clients and friends. It is designed only to give general information on the developments actually covered. It is not intended to be a comprehensive summary of recent developments in the law, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion.

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