For many syndicators, adding an investor relations employee or group is a logical next step, freeing the principals from routine investor communications and putting critical investor relationships in the hands of professionals.
As with so many things, however, there is a flip side. A group of investor relations specialists can do tremendous good for your business. Unsupervised, they can also do a lot of damage.
Three Ways to Go Wrong
There are three ways investor relations specialists can go wrong.
Way #1: They Say Things That Aren’t True
In their eagerness to perform, investor relations specialists sometimes say things that aren’t true, or make promises that can’t be kept. That kind of “loose cannon” approach invites lawsuits from unhappy investors.
Way #2: They Act as Unlicensed Broker-Dealers
Section 15 of the Securities Exchange Act of 1934 requires every broker-dealer to be registered with the SEC. A “broker-dealer” is “any person engaged in the business of effecting transactions in securities for the account of others.” A guy in your investor relations group who sells interests in your deals – your biggest, most valuable seller especially – can easily fall within that definition.
Way #3: They Act as Unlicensed Investment Advisers
Section 203(a) of the Investment Advisers Act of 1940 requires every investment adviser to register with the SEC. An “investment adviser” is “any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities. . . .”
In her eagerness to perform, your investor relations specialist, speaking of your most recent offering, says, “George, I really think this makes sense based on your goals and portfolio.” She’s crossed the line.
You Are Liable
Whether your investor relations employee says things that aren’t true or acts as an unlicensed broker-dealer or investment adviser, you are probably going to be personally liable. That means both financial liability and the possibility of being labeled a “bad actor” ineligible to participate in the capital markets, i.e., to raise money.
What to Do About It
In a later post, I’ll discuss the exceptions, the exceptions to the exception, and what you can do about it. Stay tuned.
Questions? Let me know.
Markley S. Roderick
Lex Nova Law
10 East Stow Road, Suite 250, Marlton, NJ 08053
P: 856.382.8402 | E: mroderick@lexnovalaw.com