Any individual selling stock for another must comply with the broker laws imposed by the SEC.  This is true whether the individual is a family member, friend, director or employee.   If the individual selling the stock regularly sells such stock, he must be properly registered as a broker with the SEC.   Failure to properly comply with the SEC regulations regarding any sale of stock means that both the individual handling the sale and the company upon whose behalf the stock is being sold will be fully liable for any violations – the complaining party may be awarded full return of their investment plus interest and could pursue additional damages as well.

Determining Who Qualifies as a “Broker” Per The SEC

The SEC has set forth the following factors to determine whether or not an individual selling stock qualifies as a broker:

• Is the individual an employee of the company for which they are selling the stock?  There is a presumption that employees are not brokers.  It is only a presumption and the remaining factors must be considered to see if the presumption is correct.

• Does the individual spend a substantial period of their time rendering services to the company other than selling securities?  Again, employees that provide unrelated services for the majority of their time are less likely to be considered brokers and hence, will not have to register with the SEC.

• Is the individual receiving “fixed” compensation or is their income linked directly to how much securities they sell?  Here too, if there is a fixed rate of income for the individual regardless of the amount of securities they sell, they will be less likely to be considered a broker.  A person whose income changes on the basis of the volume of securities sold will be considered a broker.

• Will the individual remain with the company after the securities are sold?  If the individual’s job terminates upon the completion of the sale then they are clearly employed as a broker and must register.  In contrast, an employee who helps sell securities but remains employed by the company long after the completion of the sale is clearly just performing a onetime additional duty to his employer and will not be required to register.

• Has the individual participated in the past in the sale of securities and/or will they be participating in future sales?  Again, repeated participation in the sale of securities will result in being classified as a broker and registration will be required.

In summation, the SEC will find an individual to be a broker if the individual either appears to be an independent salesperson temporarily calling themselves an employee but who is really in the business of selling securities or the person is a full time employee whose compensation is determined by their success in selling securities.

Contact our SEC defense attorneys for any additional information.

In essence, if an individual is not a registered broker you must be certain that they cannot be found to be “engaged in the business of selling securities” on any kind of a regular basis.  No matter who it is, you must look to their history and whether or not they have sold stock in the past and whether  they have any SEC violations already upon their record.  Special consideration and attention should be spent in evaluating individuals who may sell stock in multiple operating or fund companies – regularly selling securities for any organization, even if it is not the company they are currently affiliated with, will still force the person into a broker classification with the SEC.  Regardless of the individual’s title or classification, you must consider volume of securities they have sold in the past and how they were compensated.  If you pay them as a broker, they will most likely be treated as a broker even if this is their first and only intended sale.