SEC Calling: The Trouble With Finders in Connection With the Sale of Securities

Picture this: You have a successful business that has grown over the years, but you have hit a wall. Your growth has become stagnant and you need to infuse a hefty sum of money into the business to take it to the next level.  


So, you began the process of raising money. That’s not as easy as you thought it would be and you struggle to find investors. Finally, a business acquaintance mentions that she has financially well-to-do contacts she would be happy to introduce you to and assist with helping to raise money from these contacts. 

Of course, there needs to be something in it for her — perhaps a 10% commission on the amount raised from her contacts. Sounds good, right? What’s the harm if she can assist you in achieving your financing goals?

There are, however, risks involved with both acting as and using finders, primarily relating to potential violations of the Securities and Exchange Commission’s broker-dealer registration requirements.  Your acquaintance may unwittingly be subjecting herself to SEC sanctions and fines if she is found to be operating as an unregistered broker-dealer. More importantly, you as the business owner could be running significant risks to both you and your company. 

Unregistered
broker-dealers

A “finder” refers potential investors to a company issuing its own securities to raise capital, typically in the context of a non-public offering. The primary issue facing finders is whether they should be registered as broker-dealers under the federal and state securities laws.  

Under the Securities Exchange Act of 1934, a broker is defined as “any person engaged in the business of effecting transactions in securities for the accounts of others.” There is no broad-based finder’s exemption, either in the federal securities laws or SEC guidance.  

Whether a person should be registered or not is in part due to Section 15(a)(1) of the Exchange Act, which provides that it is unlawful for any broker or dealer to induce or attempt to induce the purchase or sale of any security unless such broker or dealer is registered with the SEC. 

Given the broad nature of the broker-dealer definition, many finders do not realize when their activities trigger a registration requirement.

The federal securities laws have no formal statutory definition of a finder, so determining whether a finder may be deemed an unregistered broker-dealer under the Exchange Act can be difficult. The SEC and courts have developed several key attributes as guidance when determining if a person should be registered as a broker-dealer.

Receiving compensation contingent on the success of a securities transaction or based on the amount or value of a securities transaction (i.e., commissions).

Engaging in solicitation of potential investors.

Providing advice or engaging in negotiations.

Previous history of finder or securities sales experience or a history of disciplinary action relating to the same.

No absolutes

Unfortunately, there is no hard and fast rule about how many of the above factors must be met to be deemed an unregistered broker-dealer. While no one factor is expressly more important than the others, SEC materials on finders indicate that receiving compensation contingent on the success of a securities transaction or based on the amount or value of a securities transaction is a hallmark factor relating to whether a person is acting as a broker-dealer. Currently, it appears the SEC staff’s position is that even one instance of transaction-based compensation may be enough for a finding that a person was “engaged in the business” of broker activity, and thus subject to registration. What does this all mean to companies seeking private funding? What are the risks both to unregistered finders and the companies that use unregistered finders? Legal issues may arise in connection with unregistered finders and guidelines for staying on the right side of the law. 

— David Thayer is a corporate and transaction attorney, and former CPA. He can be reached at [email protected] This article is part one of a two-part series. This information is not intended as legal advice. Seek specific legal advice before acting.

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