June 12, 2020

Unregistered Broker-Dealers

Written by: Galen Pham, J.D. Candidate 2022

Using an unregistered broker-dealer to help raise money for your cannabis startup or to help find and facilitate a purchase or sale can have serious legal consequences for your business, including potentially providing the investor or buyer/seller the right to rescind the deal. Before engaging with a broker-dealer, always make sure that the broker-dealer is registered and that you have notified your legal counsel.

What is a Broker-Dealer?

A broker is “engaged in the business of effecting transactions in securities for the accounts of others.” According to the SEC, broker activities include: helping an issuer (the startup) raise money in the private markets by connecting them with potential investors, and finding buyers and sellers of businesses.

While the terms “broker” and “dealer” are typically used in conjunction, technically a dealer is “engaged in the business of buying and selling securities for his own account, through a broker or otherwise”  as part of its regular business . For our purposes, the definition of broker is the more relevant consideration as it relates to finders and is the focus of this article.

While there are some exemptions from broker-dealer registration requirements , the vast majority of individuals and firms participating in the above activities must register with a self-regulatory organization, most commonly FINRA . Additionally, some states require registration in order to conduct business within the respective state. Registration allows FINRA to reduce the level of fraud by establishing practices that registered broker-dealers must adhere to and provides more transparency by detailing past violations of registered broker-dealers.

The Potential Impacts on Your Cannabis Business

Because private offerings are one of the primary ways cannabis startups can obtain funding, the cannabis industry is especially susceptible to unregistered broker-dealers or registered broker-dealers acting improperly.  Whether you are looking to sell or acquire another business (private M&A), or sell stock in your company in exchange for invested funds (raising capital), engaging with an unregistered broker-dealer can have serious consequences for your business.

Implications of Using an Unregistered Broker-Dealer in Private M&A

Though SEC guidance has eased registration requirements for “M&A Brokers,”  cannabis businesses should still be alert to individuals or firms acting as broker-dealers in the M&A context.

Consequences for the Seller

Assuming the buyer is the innocent party , § 29(b) of the Securities Exchange Act of 1934 (“Exchange Act”)  potentially provides the buyer a private right to rescind the contract. 

Further, because most purchase agreements contain representations regarding the use and compensation paid to broker-dealers in the transaction, the seller could be liable to a claim of an omission of material fact if the seller doesn’t disclose the use of an unregistered broker-dealer. 10 

Consequences for the Unregistered Broker-Dealer

Under § 29(b) of the Exchange Act, an issuer can potentially void any contract with the unregistered broker-dealer. 11  Similar rights may also be available under state law. The unregistered broker-dealer is also liable to penalties from the SEC, including: a cease-and-desist order, civil penalties, requiring accounting, and disgorgement of ill-gotten gains. 12  Punishment from state law may also apply.

Consequences for the Buyer

Assuming the buyer is the innocent party, it doesn’t face any adverse consequences.

Implications of Using an Unregistered Broker-Dealer to Raise Capital

Consequences for Your Business (the Issuer)

Due to § 29(b) of the Exchange Act, investors may have the right to rescind the sale of the issuer’s securities in exchange for invested funds. 13  Some state securities laws go further. A California domiciled investor can obtain interest in addition to invested funds. 14  Issuers also risk exempt securities status as federal and some state filings require disclosure of compensation paid to finders. Failure to make such disclosures could lead to fraud liability under Rule 10b-5 of the Exchange Act. 15  Raising future capital also may be more difficult as legal counsel is unable to deliver legal opinions in connection with future fundraising.

Consequences for the Unregistered Broker-Dealer (the Finder)

As mentioned above, the SEC has a similar scope of powers to punish unregistered broker-dealers with respect to private placements. 16  Punishment from state securities laws may also apply.

Consequences for Your Investor (the Purchaser) 

There aren’t any adverse consequences with respect to the purchaser.

Instances of Enforcement Against Broker-Dealers in the Cannabis Space 

In early 2017, the then Colorado Securities Commissioner issued a cease and desist order to a marijuna business for having a representative, who was not registered with the Colorado Division of Securities, solicit prospective investors among other violations. In June of 2018, FINRA suspended and fined a previously listed registered broker $5,000 for performing side work for a cannabis consultant firm and a medical marijuana firm in exchange for compensation and an expectation of future compensation, without notifying his FINRA member firm. In August of 2018, FINRA suspended and fined a previously listed registered broker $15,000 for publishing content on a website that violated FINRA standards for broker-dealer communications with the public while he was serving as the placement agent for a company raising money to invest in cannabis related businesses.


If your business is approached by or wants to engage a broker-dealer, you should always check to see if the broker-dealer is registered. Even if a broker-dealer is registered, legal counsel should still be notified as this affects federal and state filings and poses other compliance risks.

Disclaimer: This article has been prepared and published for informational purposes only and is not offered, nor should be construed, as legal advice.


1 Securities Exchange Act of 1934 § 3(a)(4).

2 Securities Exchange Act of 1934 § 3(a)(5).

3 See Guide to Broker Dealer Registration, SEC (Dec. 12, 2016), https://www.sec.gov/reportspubs/investor-publications/divisionsmarketregbdguidehtm.html. A “dealer” is distinguished from a “trader.” A trader is someone who buys and sells securities for his or her own account, but not as part of regular business.

4 An issuer and its associated persons are exempt from registration if certain conditions of the sale are met.

5 FINRA stands for the Financial Industry Regulatory Authority. It is the nongovernmental organization that regulates registered broker-dealers as well as maintains a database of all registered broker-dealers.

6 See SEC Provides No-Action Relief for M&A Brokers, Morgan Lewis (Feb. 5, 2014), https://www.morganlewis.com/pubs/im_lf_secprovidesnoactionreliefformabrokers05feb14.

7 Meaning, the seller is in privity with the unregistered broker-dealer and the buyer is not.

8 Securities Exchange Act of 1934 § 29(b). This provides that any contract made in violation of any provision of the Exchange Act may be void by the innocent party.

9 Robert L.D. Colby, et al., What Is a Broker-Dealer? 132.

10 M&A Securities Group, Why should a company use a broker-dealer that is registered?, https://www.securities-group.com/wp-content/uploads/2018/07/MAS__WhyShouldaCompanyusearegisteredBD.pdf

11 See, e.g. Torsiello Capital Partners v. Sunshine State Holding Corp., 2008 N.Y. Slip Op. 30979 (Apr. 7, 2008) (holding that the finder’s agreement was rescindable because the finder was unregistered and providing services that would require registration).

12 Robert L.D. Colby, et al., What Is a Broker-Dealer? 129.

13 Securities Exchange Act of 1934 § 29(b).

14 Cal. Corp. Code § 25501.5(a)(1) (effective Jan. 1, 2005).

15 Securities Exchange Act of 1934 Rule 10b-5. This rule prohibits making materially misleading statements or omissions in connection with the sale of any security.

16 See supra note 12 and accompanying text.

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