© 2020 Arizent. All rights reserved.

Giving Proper Thanks for a Referral

Register now

We send a thank-you letter to a client who refers a prospect to us. If the prospect becomes a client, are we allowed to send a thank-you letter telling the person who made the referral that the prospect became a client, or does that violate privacy issues?

— D.J., Virginia

Regulation S-P generally prohibits financial institutions (brokers, dealers, investment companies and investment advisors) from releasing nonpublic personal information about individual consumers to nonaffiliated third parties unless the firm has provided notice to the consumer and given him or her a chance to opt out. We could argue over whether the new client's name is nonpublic information as it relates his or her being a client of yours, and whether that information would be considered nonpublic as it pertains to the person who referred the client to you in the first place. Considering how serious the regulators treat a violation of Reg S-P, however, the safest answer to your question is that you should obtain the new client's consent before sending a thank you-note to the person who referred him or her to you. The effort involved in obtaining such consent is minimal compared with the potential hassle of dealing with an alleged Reg S-P violation.


I've been hearing more about crowdfunding in connection with social media and the Internet. I admit I'm not particularly tech savvy. Can you give me some information on crowdfunding? Is it considered unregistered securities?

— K.B., Illinois

Crowdfunding is the term given to a method used by some entrepreneurs to attract like-minded people (usually via social media) to contribute toward a venture that might not otherwise be able to attract private equity. The popularity of crowdfunding has been growing along with social media. Until April 2012, only a small number of crowdfunding sites were operating legally. These sites were permitted to operate only on a reward or donation basis, essentially offering a product, discount or other inducement in exchange for a monetary contribution.

The issue has been whether such inducements constituted securities. In SEC v. W.J. Howey Co. (328 U.S. 293 (1946)) and subsequent decisions, the U.S. Supreme Court classified an interest as a security only if an investment of money has been made in a common enterprise, and the investor has the expectation of profits, which are expected to arise solely or substantially from the efforts of the promoter or third party.

With passage of the Jumpstart Our Business Startups Act (the JOBS Act for short), the general public will have the ability to receive company equity in exchange for funding. Before that can happen, however, the SEC has to establish rules and regulations. For example, limits are placed on the amount of crowdfunded securities that can be sold to an investor in any 12-month period based on his or her annual income and net worth. Crowdfunding creates an offering structure that interposes an intermediary between the issuer and the investor. The issuer, the intermediary, and the investor alike are subject to specific responsibilities and limitations on participation in crowdfunded offerings.

Pending rules were published for comment in August. Final regulations were expected by the end of the year, but have been delayed. In the meantime, intermediaries performing crowdfunding on behalf of issuers must register with the SEC and FINRA as funding portals.

Alan J. Foxman is an attorney with the law offices of Rita G. Dew, P.A.
and a senior consultant with National Compliance Services, Inc.
in Delray Beach, Fla. He can be contacted at: 
this email address.

For reprint and licensing requests for this article, click here.