Quick Answer
An issuer's own associated person, meaning a partner, officer, director, or employee, can help sell the issuer's securities without registering as a broker if three baseline conditions hold (no statutory disqualification, no transaction-based compensation, no association with a broker-dealer) and the person also fits one of three additional participation paths.
This safe harbor answers a narrow question: when can the issuer use its own people to sell, instead of routing every sale through a registered broker-dealer. Meeting the three baseline conditions is necessary but never sufficient by itself.
What Are the Three Baseline Conditions Every Associated Person Must Meet?
An associated person of the issuer is a partner, officer, director, or employee of one of four entities. Those four are the issuer itself, a corporate general partner of a limited partnership that is the issuer, a company or partnership that controls, is controlled by, or is under common control with the issuer, and a registered investment adviser to a registered investment company that is the issuer.
To rely on this safe harbor, that person must meet all three of the following:
- The person is not subject to a statutory disqualification at the time of participation.
- The person is not compensated for that participation by commissions or other pay based, directly or indirectly, on securities transactions.
- The person is not, at the time of participation, an associated person of a broker or dealer. Two people fall outside that term here: someone whose functions at the firm are solely clerical or ministerial, and someone a state makes register only because they are an issuer, or an issuer's associated person.
What Are the Three Additional Participation Paths?
Meeting all three baseline conditions above is necessary but not sufficient. The associated person must also fit one of three additional participation paths.
| Path | What it allows |
|---|---|
| Limited-purchaser path | Restricts participation to sales made to specific institutional purchasers, to sales made under three narrow statutory exemptions, to a plan submitted for a shareholder vote or written consent, or to a listed employee benefit plan. |
| Incidental-duties path | The person primarily performs, or intends to primarily perform by the end of the offering, substantial duties for the issuer unrelated to securities transactions; was not a broker-dealer, or associated with one, in the preceding 12 months; and does not sell securities for any issuer under this path more than once every 12 months. |
| Passive-communication path | Restricts participation to preparing written communications, or delivering them by mail or other means, with no oral solicitation by the associated person (content approved by an issuer officer, partner, or director), to responding to an unsolicited inquiry using only information already in the registration statement or offering document, or to purely ministerial or clerical work. |
Which institutional purchasers qualify under the limited-purchaser path?
- A registered broker-dealer
- A registered investment company or registered separate account
- An insurance company
- A bank
- A savings and loan association
- A trust company or similar institution supervised by a state or federal banking authority
- A trust for which a bank, a savings and loan association, a trust company, or a registered investment adviser is trustee or is authorized in writing to make investment decisions
What are the other three limited-purchaser categories?
- Sales made in transactions that qualify under three separate, narrower statutory exemptions from the Securities Act, distinct from the private-placement exemption itself
- Sales made under a plan or agreement submitted for the shareholder vote or consent: a reclassification, a merger or consolidation or similar plan of acquisition involving an exchange of securities, or a transfer of another person's assets to the issuer in exchange for the issuer's securities
- Sales made under a listed employee benefit plan, for example a pension, stock purchase, or dividend reinvestment plan
Exam Tip: Gotchas
- The "once every 12 months" cap belongs to the incidental-duties path only. A person relying on the limited-purchaser path or the passive-communication path is not subject to that frequency limit.
- For a shelf registration (a filing that lets an issuer sell securities in stages over time without a new registration for each sale), the 12-month clock for the incidental-duties path runs from the last sale within that one registration, not from the registration's filing date.
Is This Safe Harbor the Only Way to Avoid Broker Registration?
No. The associated-person safe harbor is voluntary, not exclusive. If a person does not meet the three baseline conditions and one of the three paths, that alone does not create a presumption that the person violated the broker-registration requirement. Losing the safe harbor just means the ordinary broker-registration analysis applies instead.
Exam Tip: Gotchas
- Failing a condition of the safe harbor does not, by itself, make someone a broker. It only means the person cannot rely on the safe harbor, so whether registration is required gets decided the ordinary way.
How Is This Different From Paying an Outside Finder?
This safe harbor only ever covers the issuer's own associated persons, people who are already a partner, officer, director, or employee of the issuer or of one of the three affiliated entities named above. It never reaches an unregistered outside introducer or finder who helps raise money for a fee; that compensation question is covered in a different unit of this course.
Exam Tip: Gotchas
- This safe harbor answers "when is the issuer's own employee not a broker." A different question, compensating an outside, unregistered finder for raising money, is tested elsewhere in this course. Both trace back to the same broker-registration question, but this safe harbor never extends to an outside finder.
What Should You Check on Exam Day?
- Confirm all three baseline conditions hold (no disqualification, no transaction-based pay, no broker-dealer association) before checking which path applies.
- Match the fact pattern's activity, institutional sales, incidental duties, or passive communications, to its specific path; each has its own conditions.
- Remember the 12-month frequency cap applies only to the incidental-duties path.
- Recognize that failing the safe harbor does not automatically make someone a broker; it just removes the safe harbor.
- Distinguish an issuer's own associated person from an outside, unregistered finder; the safe harbor never covers the finder.