“Finders”/”Solicitors”

When looking for additional capital, many companies consider working with third parties who offer to find investors and to serve as an intermediary between the company as an issuer of securities and potential investors. Such intermediaries often refer to themselves as “finders,” “business brokers,” “investment facilitators,” “investment consultants” or even “specialized investment bankers,” and their backgrounds vary from individuals with interesting rolodexes (celebrities, former politicians, and retired corporate executives) to bankers, venture and investment fund professionals, and other experienced securities market professionals.

Most finders, especially those who are paid based on a percentage of the amounts invested or based on the outcome or size of any transactions resulting from their assistance, are required under applicable federal and state laws to be registered as broker-dealers with the Securities and Exchange Commission (the “SEC”), state securities regulators and the Financial Industry Regulatory Authority (“FINRA”). Many finders are not appropriately registered, however.

A finder’s failure to be appropriately registered poses significant risks for the company issuing the securities and the finder. Under Section 15(a) of the Securities Exchange Act of 1934 (the “1934 Act”), any person acting as a “broker” must be registered with the SEC; the same is true under the California securities laws. According to the 1934 Act, a “broker” is “any person engaged in the business of effecting transactions in securities for the account of others.”

There are multiple factors that will be taken into account by regulators and courts in determining whether an unregistered finder is acting as a broker, each of which should be carefully considered by a company that is considering using a finder.  The most important of factor, and most common, is the receipt of transaction-based compensation. Regulators believe that such compensation gives the finder a “salesman’s stake” in the transaction, and could therefore lead to the kind of abuses that broker-dealer registration and regulation is intended to prevent.

Recent decisions by courts and regulators appear to indicate that anyone involved in finding investors for securities issuers in return for compensation can be held to be acting as an unregistered broker, with dire consequences for both the finder and the issuer of the securities involved.

The consequences to an issuer of using a finder that is an unregistered broker can be severe. In the worst case scenario, the issuer could find itself the target of enforcement action by the SEC or state securities regulators, facing civil penalties, restrictions on future investment activities, and possibly prosecution for aiding and abetting the security law violations of the finder.

However, from a practical perspective, it is more likely that the negative consequences of the use of an unregistered broker will not stem from enforcement action, but instead will arise in the context of a dispute with investors.

Simply put, purchasers of securities sold in the offering in which the finder was involved would have the right to rescind their purchase and have their investment returned to them, with interest. This right of rescission would apply to any purchaser in the transaction, and not just those purchasers located by the finder. The issuer would have no assurances that any investor who is or later becomes dissatisfied with the direction of the company would not exercise the right of rescission.

If you have used, are considering the use of, or are uncertain about whether the person you dealt with is, a finder in the placement of securities, please contact Wittenberg Law to discuss your legal rights and options.