Background -

“Matchmaking sites,” also referred to as “matchmaking platforms,” have come to play a more significant role in capital formation in recent years. A matchmaking site generally relies on the Internet in order to “match” or introduce potential investors to companies that may be interested in raising capital. However, in order to avoid the requirement to register with the Securities and Exchange Commission (SEC) as a broker-dealer, a matchmaking site generally will limit the scope of its activities. Under Section 3(a)(4) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), a “broker” is defined as any person that is “engaged in the business of effecting transactions in securities for the account of others.” The SEC has noted that a person “effects transactions in securities if he or she participates in such transactions ‘at key points in the chain of distribution’” and that a person is “engaged in the business” if he or she receives transaction-related compensation and holds himself or herself out “as a broker, as executing trades, or as assisting others in completing securities transactions.” The determination as to whether an entity is acting as a “broker” is complex. The SEC closely considers many criteria and the specific facts and circumstances. Generally, though, the SEC has attributed great significance to whether the entity receives transaction-based compensation.

Prior to the enactment of the Jumpstart Our Business Startups Act (the “JOBS Act”), the SEC staff issued several no-action letters to matchmaking sites that sought relief from the requirement to register as broker-dealers. The no-action letter relief generally was conditioned on the requirement that the matchmaking site...