Just Who Is A Promoter And Why You May Want To Know

by Allen Matkins
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The California General Corporation Law uses, but does not define, the term “promoter”.  For example, a promoter can be criminally prosecuted.  Corporations Code Section 2251 provides that any promoter “who knowingly and willfully issues or consents to the issuance of certificates for certificated securities, or initial transaction statements or written statements for uncertificated securities, in violation of this division with intent to defraud present or future shareholders, subscribers, purchasers of shares or creditors is guilty of a misdemeanor . . .”.  It can also be a crime to lead someone to believe that a person is a promoter when in fact no such relationship exists.  See Cal. Cal. Corp. Code § 2257.  Thus, it seems that it may be useful to know exactly who or what a “promoter” might be.

Etymologically speaking, “promoter” is derived from two Latin words pro, meaning forward, and movere, meaning to move.  Thus a promoter is someone who moves things forward.  This definition is in accord with the Commissioner of Business Oversight’s definition in Rule 260.102.12(f): “a person who, acting alone or in conjunction with one or more other persons, takes the initiative in founding and organizing the business or enterprise of an issuer.”  Strictly speaking, however, that definition does not apply to the General Corporation Law.

The Securities and Exchange Commission has a more detailed definition of “promoter” in both Rule 405 under the Securities Act of 1933 and Rule 12b-2 under the Securities Exchange Act of 1934:

(i) Any person who, acting alone or in conjunction with one or more other persons, directly or indirectly takes initiative in founding and organizing the business or enterprise of an issuer; or

(ii) Any person who, in connection with the founding and organizing of the business or enterprise of an issuer, directly or indirectly receives in consideration of services or property, or both services and property, 10 percent or more of any class of securities of the issuer or 10 percent or more of the proceeds from the sale of any class of such securities.  However, a person who receives such securities or proceeds either solely as underwriting commissions or solely in consideration of property shall not be deemed a promoter within the meaning of this paragraph if such person does not otherwise take part in founding and organizing the enterprise.

See also Item 1-02 of Regulation S-X.  The term is actually used in Items 401, 404 and 509 of Regulation S-K.

The SEC’s adoption of its so-called “bad actor” rules makes knowing the meaning of “promoter” important for issuers relying on Rule 506 under the Securities Act.  Under these amendments, the disqualification provisions apply to a long list of covered persons.   Buried in this list is “any promoter connected with the issuer in any capacity at the time of such sale.”  The adopting release provides this additional color:

The category of “promoter” is broad, and captures all individuals and entities that have the relationships with the issuer or to the offering specified in Rule 405.  In particular, the definition requires issuers to look through entities and makes it unnecessary for us to separately cover the officers, directors and other control persons of entities that qualify as promoters. . . .  The test [in Rule 405] considers activities “alone or together with others, directly or indirectly”; therefore, the result does not change if there are other legal entities (which may themselves be promoters) in the chain between that person and the issuer.

Footnote omitted.  The generality of the definition and the SEC’s expansive interpretation illustrates why the “bad actor” rule amendments are simply bad.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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