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SPCC Applauds Introduction of the Defining Dealer Act

Posted on by SPCompany

FOR IMMEDIATE RELEASE

Contact: Marc Indeglia, President, Small Public Company Coalition

SMALL PUBLIC COMPANY COALITION APPLAUDS INTRODUCTION OF THE DEFINING DEALER ACT

Legislation Restoring the Statutory Definition of “Dealer” Under the Securities Exchange Act of 1934

Washington, D.C. — The Small Public Company Coalition today issued the following statement in strong support of H.R. 8328, “Defining Dealer Act” – legislation introduced by Representative Byron Donalds (FL-19) to overturn the Eleventh Circuit’s decisions in SEC v. Almagarby and SEC v. Keener and to repudiate the SEC’s novel and radical enforcement campaign targeting professional investors under a dangerously overbroad interpretation of the statutory definition of “dealer” under the Securities Exchange Act of 1934 (the “Exchange Act”).

Section 15(a) of the Exchange Act requires registration by persons “engaged in the business of buying and selling securities” for their own account. For decades, the line between a “dealer”—who intermediates between buyers and sellers, executes customer orders, and holds itself out to the public—and an investor or trader who deploys capital at its own risk was well understood. The SEC abandoned that understanding, and several courts, including the Eleventh Circuit, have followed it into serious error.

The Eleventh Circuit’s decisions in Almagarby and Keener rest on a single deeply flawed premise: that anyone whose business model is centered on the purchase and sale of securities for their own account is a “dealer,” irrespective of whether that person renders any of the services that have historically defined dealer status—maintaining a market, holding out to buy and sell on demand, executing customer transactions, or providing liquidity to the public. Under this logic, any active investor with a consistent investment strategy is potentially a “dealer.” The statutory trader exception is rendered meaningless, and the term “dealer” is unmoored from any discernible standard of conduct against which a market participant can calibrate its behavior or plan its affairs.

The consequences extend far beyond the specific defendants in those cases. The SEC’s enforcement theory, if left uncorrected by Congress, threatens to sweep in investment companies, registered investment advisers, family offices, venture capital funds, private equity funds, hedge funds, PIPE investors, and ELOC funds—in short, the full architecture of professional investing in this country. None of these institutions has historically been understood to be a “dealer.” None of them intermediates customer transactions. None of them is the kind of entity Congress had in mind when it enacted the dealer-registration provisions of the Exchange Act. Yet each of them now operates under the shadow of an enforcement theory with no principled limiting principle and no discernible standard of acceptable conduct.

This uncertainty is not theoretical. The SEC’s enforcement campaign and the rulings it has produced have had a broad and demonstrable chilling effect on capital formation—most acutely for the small and emerging companies that depend on private investment to fund their growth. Convertible debt financing, PIPE transactions, and equity line facilities have long provided essential capital to smaller public companies that cannot access institutional credit markets on competitive terms. As investors recalibrate their exposure to regulatory risk under this unpredictable enforcement theory, it is these companies—and their employees, suppliers, and communities—that bear the cost.

The interpretation embraced by the Eleventh Circuit is inconsistent with the text, structure, and legislative history of the Exchange Act. It is inconsistent with decades of Commission guidance and no-action practice. And it is inconsistent with fundamental principles of fair notice: regulated parties are entitled to know, in advance and with reasonable clarity, what conduct triggers registration obligations. An enforcement theory whose outer boundary cannot be articulated is not a legal standard—it is an invitation to arbitrary and unpredictable enforcement.

“The SEC has pursued a novel and boundless enforcement theory that treats professional investors as unregistered broker-dealers simply because buying and selling securities is central to what they do. That is not what the Exchange Act says, it is not what Congress intended, and it is not what decades of settled practice have reflected. The Defining Dealer Act restores clarity, protects capital formation, and ensures that the professional investment community can continue to serve the small public companies that depend on it.”

— Marc Indeglia, President, Small Public Company Coalition

Congress has both the authority and the responsibility to act. The Small Public Company Coalition urges Members of the House and Senate to pass legislation clarifying that the acquisition, holding, conversion, or disposition of securities for one’s own account—without holding out to the public or effecting transactions on behalf of customers—does not constitute “dealer” activity under the Exchange Act. Such legislation would restore the statutory framework Congress enacted, eliminate an enforcement regime with no discernible limiting principle, and preserve the private capital markets that small public companies depend on to grow, create jobs, and serve their communities.

 

The Small Public Company Coalition thanks Congressman Donalds for his leadership and calls on Congress to pass this legislation without delay. Our member companies, the investors who support them, and the broader capital markets cannot afford to wait for the courts to correct an error that the SEC has spent years propagating.

SPCC President Marc Indeglia Quoted in Bloomberg Law Article on “Dealer” Definition

Posted on by SPCompany

Finance Firms Wary of Being Swept Up in Creeping SEC Dealer Rule

By Matthew Bultman 2023-03-31

  • SEC’s court positions casting a wide net, groups say
  • Comes as agency has proposed rule expanding criteria

    The SEC is quietly expanding its definition of “securities dealers” subject to tighter agency oversight, triggering a pushback from some private funds and investment advisers that are leery of more regulations.

    The Securities and Exchange Commission is finalizing a rule that, as proposed, would clarify and expand the definition to include some financial firms—such as high-frequency traders—that have traditionally not been considered a dealer.

    Industry advocates say the agency also is using recent lawsuits against penny-stock flippers to go further than it’s likely to do in its rulemaking—to stake out the position that a “dealer” is any company whose business model is based on buying and selling securities.

    The agency’s statements in court filings represent a sweeping interpretation of federal securities law, critics say. The expansive definition of “dealer” has the potential to capture numerous businesses, including hedge funds and venture capital funds, that are already subject to regulations, they said.

    “The type of language that is coming out of the Commission in its briefing in these various cases is so expansive that it would be one of the largest nets one might cast with respect to this industry,” said Marc Indeglia, a partner at Glaser Weil LLP and president of the Small Public Company Coalition.

    Dealers generally have to register with the SEC and join an organization like Financial Industry Regulatory Authority (FINRA). They’re subject to various rules, like trading reporting obligations and net capital requirements.

    Funds facing registration could change their investment strategies to avoid being labeled a dealer, industry reps say.

    Critics of the SEC’s approach have zeroed in on a case the agency won against a Florida man, Ibrahim Almagarby, and his company, Microcap Equity Group, who are accused of acting as unregistered dealers. The US Court of Appeals for the Eleventh Circuit is expected to rule on it this year.

    The SEC in court filings denies there’s anything radical about its interpretation of “dealer” and said critics are ascribing to the agency a position that it hasn’t taken. The agency declined to comment beyond its filings.

    “Almagarby engaged in classic dealer activity by acquiring discounted securities from issuers and selling them as quickly as possible,” SEC lawyers said in court filings.

    Flipping Stocks

    Almagarby was a 29-year-old student at Palm Beach State College in South Florida when he started MEG out of his home, according to court documents.

    MEG would buy aged debt from penny stock issuers. After converting the debt into equity for discounted prices, MEG sold the new shares for a profit, the SEC alleged in a 2017 complaint. Almagarby and MEG were alleged to have made over $1.4 million.

    Finding MEG was a dealer, the district court said the company’s business model was predicated on quickly unloading shares. MEG also had a network of deal finders, including a boiler room of telemarketers who cold called dozens of companies per day, the court said. MEG appealed to the Eleventh Circuit.

    “He was doing all the things that dealers do,” said Cheryl Nichols, a Howard University law professor and former SEC attorney.

    But financial trade groups—like the Alternative Investment Management Association and Small Public Company Coalition—have balked at what they argue are sweeping statements from the SEC that suggest a dealer is any business that buys and sells securities for profit.

    “The approach that they’ve taken here, it encompasses anyone who invests in companies as part of a business, without regard to any other considerations,” Indeglia said. “Our view is that is radically different than what the world thinks it is.”

    In a brief against Almagarby, the SEC indicated that the fact that his business model was based entirely on buying and selling securities could be “conclusive proof” that MEG is a dealer.

    That type of statement is a trend in recent cases, industry trade groups say. In a lawsuit against Carebourn Capital, LP, the SEC said the only “definitional requirement is that a dealer engages in the business of buying and selling securities.”

    In another case, against LG Capital Funding LLC, the SEC emphasized that “LG Capital is a business: it has offices, employees, keeps accounting records, and carries on for profit. And its business model is to buy and sell securities.”

    That kind of theory could have vast implications for financial markets, AIMA, SPCC, and the National Association of Private Fund Managers said in an amicus brief supporting Almagarby.

    “If a dealer is any company whose ‘business model’ is based on the ‘purchase and sale of securities,’ the only thing standing between nearly every financial firm and an enforcement action is the ‘benevolence’ of government lawyers,’” the groups said.

    Daniel Austin, AIMA’s director of US policy and regulation, said the SEC’s interpretation is “simply inconsistent with the statutory text and the general understanding from the commission and market participants for the past almost 90 years.”

    Rulemaking Impact

    The Eleventh Circuit is considering Almagarby’s case as the SEC is working to finalize a rule that, as proposed in March 2022, would require more companies to register as dealers.

    The proposal outlines certain standards that can trigger dealer status. That includes regularly making comparable purchases and sales of the same securities in a day.

    The standards the SEC outlined ‘build upon and are consistent with past Commission regulations and case law for defining a dealer” under the Exchange Act, the non-profit group Better Markets said in a letter supporting the proposal.

    But Republican lawmakers and other industry organizations are pushing back.

    Sen. Bill Hagerty (R-Tenn.) and Rep. French Hill (R-Ark.), have asked the SEC to justify including private funds in the proposal. Private funds have signaled they’ll change or abandon some investment strategies if forced to register as dealers, they said.

    The Eleventh Circuit’s decision in Almagarby’s case could impact the rulemaking, lawyers said.

    “When the court says what the Exchange Act means, and what the word ‘dealer’ means, that could constrain or have an effect on the commission’s authority to interpret that in its rulemaking,” Gibson Dunn & Crutcher LLP attorney Brian Richman said recently on AIMA’s podcast.

    The case is SEC v. Almagarby, 11th Cir., No. 21-13755 .