Finders, Registration and Exemptions

securities lawyer

 

Finding Finders

When do they have to register. Or do they have to at all?

By Mark J. Astarita, Esq.


A question I am often asked is what is the definition of a finder, or questions that lead to that question. The issue arises when an unregistered person or entity introduces investors to an issuer, and seeks to obtain payment based on the investment made by the investor. The problem is, that in many instances, the introducing party is acting in a manner that requires registration as a broker or a dealer, and thus must be registered in order to accept compensation for the introducing the investor.

The issues of finders and compensation is currently a “hot” topic for securities regulators, and the issue is in great flux today. It is therefore difficult to describe finders in a general way that is helpful, because the answer in a particular case will turn on the particular facts. One small factual change, and the answer changes.

Additionally, while SEC No Action letters can sometimes be used as guidance as to how the SEC will react to a similar set of facts, SEC No Action letters surrounding finders are getting old, and the view of finders may change in the very near future.

Therefore, addressing the issue GENERALLY, if the finder is only a finder, he does not have to register. Being a finder means that he only introduces, he does not discuss, negotiate or get involved in the transaction.

The rules which apply are varied, and the issue also involves SEC decisions and no action letters. Starting at the beginning, Section 2(a)(12) of the Securities Act of 1933 defines the term “dealer” as “any person who engages either for all or part of his time, directly or indirectly, as agent, broker, or principal, in the business of offering, buying, selling, or otherwise dealing or trading in securities issued by another person.” Section 15 of the Securities Exchange Act of 1934 requires that brokers and dealers register with the SEC. In Section 15, the phrase used to define the conduct which invokes a registration requirement is “to induce or attempt to induce the purchase or sale of, any security”. The SEC has issued a number of no action letters addressing this question, and unfortunately, they have not been consistent. In a series of no action letters, the SEC has confirmed that a person who merely makes an introduction, without more, is not required to register, and in some instances, has permitted the finder to obtain compensation based on the amount of money invested. On the other hand, the SEC has also stated that other finders, who are making introductions would require registration.

The reason for the inconsistency is the fact that the determination of whether the finder is required to register is factually driven. The answer turns on what the finder does, whether he discusses the investment with the investor, whether he attends meetings, delivers offering material, or engages in other conduct which would lead one to conclude that he was “inducing” the sale, or “effecting” the transaction.

Another factor is how the finder is paid. While most finders are paid on the basis of a percentage of funds raised, some are paid by the hour, others on a flat fee. The simple answer is, the more involved the finder is, and the more his compensation is based on the funds raised, the more likely the requirement that he be registered. Conversely, if the finder merely introduces the investors to the issuer, and takes a flat fee, then he probably does not have to register at all.

A key factor in the registration continuum is the negotiation aspect of the finder’s involvement. The SEC has often referred to the finder’s involvement in the negotiation of the terms of the investment as a reason for requiring registration. Again, the clearest example of conduct which does not require registration is where the finder provides a list of potential investors to the issuer, and does nothing more. In that situation, compensation can be paid, and no registration is required.

The other extreme is a case where a firm acted as a consultant regarding mergers and asset sales, reviewed financial reports, and advised management on financial decisions. The firm received commissions based on the price at which a transaction was consummated and occasionally participated in negotiations concerning the transaction. In that no action letter, the SEC stated that the firm was required to register as a broker-dealer, citing its role in the negogiation and planning of the transaction.

We are expecting the SEC to issue a new release regarding finders, and will report it on the main page of the site when it is released.

Nothing herein is intended as legal or financial advice. The law is different in different jurisdictions, and the facts of a particular matter can change the application of the law. Please consult an attorney or your financial advisor before acting upon the information contained in this article.


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