Anyone paid on production is a “broker” who needs to register with the SEC
Two of you are starting a hedge fund and agree to split the management and performance fees in proportion to the money you each bring in.
Or, alternatively, you are a fund manager who hires a dedicated, in-house marketer to raise capital for your fund and the marketer is paid a percentage of his or her production.
In either case, the people who are compensated specifically for selling private fund interests – even if they are owners of the fund manager – are considered to be “brokers” engaged in the business of selling securities. It doesn’t matter that the securities in question are privately placed rather than sold in the public markets.
Under U.S. law, anyone purporting to engage in the business of effecting securities transactions for the accounts of others – whether in the public or private markets — needs to pass a Series 7 examination and register as a broker with the SEC. He or she must also become associated with an SEC-registered brokerage firm that assumes responsibility for supervising his or her marketing activities and is a member of the Financial Industry Regulatory Authority (FINRA, f/k/a the NASD). The brokerage firm should also be licensed in the states in which the broker markets the fund.
Once associated with a FINRA member firm, a broker is subject to FINRA’s rules regarding marketing activity, such as having all of his or her correspondence with investors approved by a qualified supervisor and all of his or her commissions paid through the FINRA member firm.
The only relevant exemption from broker registration for marketers of private investment funds – the so-called issuer’s exemption – excuses the funds themselves from registering with the SEC as brokers because they are selling securities for their own accounts and not for the accounts of others. This exemption, however, applies only to those personnel of an issuer whose primary responsibility is not selling its securities and who are therefore not paid transaction-based compensation. As a result, the issuer’s exemption would not be available to either the fund partners or the dedicated, in-house marketer in the examples cited above. By definition, the exemption would not also extend to third-party marketers, private placement agents or independent ‘finders’ who are paid specifically for capital production.
When all is said and done, if you raise capital for hedge funds, venture capital funds, private equity funds or funds of funds, the only way to avoid the broker registration requirement (and its attendant obligations) is to make sure that your compensation is not tied to the amount of capital you raise.