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Massachusetts SJC securities law case gets it wrong

Laws and institutions, like clocks, must occasionally be cleaned, wound up, and set to true time.

— Henry Ward Beecher

A recent article in Massachusetts Lawyers Weekly flagged a new Supreme Judicial Court case that suggested, upon first impression, a material change in the laws that prohibit persons, unregistered as brokers, from raising investments for businesses.

This putative result is a misreading of the close holding in the case NTV Management, Inc. v. Lightship Global Ventures, LLC.  For this reason, the case needs to be parsed. More interesting than understanding what the case actually holds, however, is the belief that it was also wrongly decided.

The legal setting

Both state and federal law provide that any party (herein sometimes “finder”) in the business of effecting transactions in securities, without first registering as a broker-dealer, commits an illegal act.

The Massachusetts statute, G.L.c. 110A(f), also provides that “(n)o person who has made or engaged in the performance of any contract in violation of any provision of this chapter or any rule or order hereunder, or who has acquired any purported right under any such contract with knowledge of the facts by reason of which its making or performance was in violation, may base any suit on the contract.”

The analogous federal law (section 29(b) of the ’34 Act) “voids every contract made in violation of any provision of this title,” which includes the requirement of broker registration.

The case

Plaintiff NTV entered into a contract with defendant Lightship to provide a wide variety of ill-defined services: “consultancy and advisory services” in support of NTV’s effort to acquire from IBM a certain business that the CEO of the defendant once had operated while then still employed by IBM.

NTV was to coordinate, oversee and direct “the acquisition” and the “financing transactions” necessary to “facilitate” the acquisition, including to “source capital” from “investors and lenders.”

NTV was to be paid a commission based on capital raised from sources NTV generated, or alternately an “advisory fee” if it introduced at least 10 qualified sources if financed by investors not NTV-introduced.

In fact, a non-NTV party ultimately financed the deal, forming with NTV a new entity wherein the new investor received 60 percent of the equity, and the Lightship founder became CEO and received non-controlling equity.


NTV sued Lighthouse for breach of contract and breach of the implied covenant of good faith and fair dealing, and sued both Lighthouse and its CEO under Chapter 93A for unfair trade practices.

At trial, the plaintiff was awarded judgment for $330,000, trebled under Chapter 93A, plus legal fees. The award was set aside by the judge on the grounds that the NTV contract was unenforceable because NTV was not registered as a broker.

NTV appealed, the SJC took the case on its own initiative and, in a lengthy opinion covering every conceivable aspect of the issues in dispute, reversed the court below and found that the NTV contract did not violate the law because NTV was not required to be registered to perform it.

Some practitioners might reach the conclusion that now-unregistered brokers could raise funds for a company, in a private transaction, and could be compensated for the effort. That conclusion is inconsistent with the narrow finding of the case. If accurate, such a conclusion would have widespread practical ramifications for capital formation.

As often cited in this column, many finders currently operate without registration. After decades of dispute, the Securities and Exchange Commission in 2014 by a certain “No-Action Letter” set forth a narrow path to permit unregistered finders to raise capital for M&A transactions. (It should be noted that this path is not binding on the states, nor on private litigants.)

But the SEC declined to grant the same permission to finders raising capital for an enterprise outside of the M&A setting.

What in fact did the court determine?

Starting with the statutory definition of a broker, the question posed by the court, to be answered by itself, was this: “(1) whether the contract requires that the transactions ‘effected’ be in ‘securities’; and (2) whether the contract requires a person to ‘effect’ such transactions.”

After determining that the open-ended contract might or might not result in the sale of a security (though beyond our immediate scope of analysis, not all debt instruments or notes are in fact held to be securities under securities law, as for example a note given a lending bank for a revolving or term loan is not), the SJC noted that NTV might have introduced a transaction by arranging a bank loan, an action not making NTV in violation of securities laws.

The court did distinguish the NTV case from other reported decisions, wherein an actual transaction involving the sale of a security had in fact occurred, thus requiring registration of the finder. “The issue then becomes whether the contractual language necessitates the conclusion that NTV was required to ‘effect’ a transaction in ‘securities.’”

What does NTV mean? First, it does not mean that finders raising funds for companies need not register when they raise those funds by sale of securities. 

Because performance under the contract was open-ended, the court “therefore cannot ascertain whether the ‘equity’ transaction alluded to in the contract would be a transaction in securities.”

As there was no requirement that a transaction would necessitate broker registration, NTV was awarded treble $330,000 and legal fees, having been deprived of its opportunity to earn a commission in a transaction not demanding finder registration.

What regulatory ramification does such a narrow holding imply? What if NTV itself in fact had found financing by the sale of shares of stock to 50 people; in the face of the fact that such a deal would therefore demand broker registration, presumably the decision would have been different.

And certainly the SEC and the state regulators would in that instance successfully assert that NTV could not obtain payment. What NTV received here was in effect a breakup fee, as it was denied the ability to perform what might have been a transaction that would not have disqualified its fee entitlement.

What does ‘NTV’ mean?

First, it does not mean that finders raising funds for companies need not register when they raise those funds by sale of securities.

In the No-Action Letter, the SEC in very well-defined circumstances did exempt finders from registration if they were engaged to and compensated for effecting an acquisition. And this decision is consistent with that mindset concerning M&A deals, but in no way leaks over into a purely capital-raising engagement.

Second, therefore, a good way to think about NTV is within the spirit of the No-Action Letter permitting unregistered finders to effect M&A deals, even though literally read NTV did not conform to the language of the No-Action Letter.

Look at the substance of the transaction in fact undertaken in the NTV case. A former IBM employee has effected a management buy-out together with a single person who provided the funding and ended up with 60 percent of the acquiring entity (the No-Action Letter defines an M&A transaction as one wherein the investors obtain at least a 25 percent ongoing equity position). The SJC has treated the entire transaction as if it were an M&A deal, avoiding the knotty issue of broker registration.

Indeed, the SJC does make passing reference to the No-Action Letter, although not as a basis for the decision but rather to help distinguish another case that was decided prior to that letter.

While understandably the SJC does not have the authority to unilaterally declare an expansion of the SEC position, we can suspect that, at base, the justices did not see a difference on a practical level between the Lighthouse deal and a regular M&A transaction.

So that might be the end of our analysis, except for the sneaking suspicion that the decision also is simply wrong on its face.

Recall the nature of contracts that cannot be sued upon. Under federal law, any contract “made” in violation of the law is void. Under Massachusetts law, no person who has “made” a contract in violation of the statute can bring suit.

The NTV contract does permit a transaction of the sort that would require broker registration, although the ultimate transaction did not. Why is the contract not unenforceable under both statutes? Neither statute requires that the contract be fulfilled in violation of law, only that the contract as made would permit it. Did the SJC frame the wrong question?

I conclude with an attenuated analogy to illustrate my point. Assume that I enter into a written contract to be paid $1,000 if I shoot a man’s enemy or walk a man’s dog. Overnight, I do neither, and the next morning I am told by the man that the deal is “off.” I sue for anticipatory breach and breach of the covenant of good faith and fair dealing. I find it hard to believe the SJC would give me recovery.

Stephen M. Honig practices at Duane Morris in Boston.

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