DealLawyers.com Blog

Here’s a reminder from Dorsey & Whitney’s Ken Sam about the risks companies face when they pay transaction fees to unregistered brokers. Sometimes, people tend to view compliance with appropriate licensing requirements as the broker’s problem.  As this excerpt makes clear, it’s a problem for everyone involved in the deal:

Finder Risks:  Any unlicensed person engaging in activities designed to effect a transaction in securities may violate broker-dealer laws. The SEC or state securities regulators may seek to enjoin the unlawful activities or seek monetary penalties or criminal sanctions.

Issuer Risks:  Retaining and permitting an unlicensed intermediary to effect a securities transaction may be a violation of federal and many state laws, and may subject the issuer to possible civil and criminal penalties. Any person that knowingly or recklessly provides substantial assistance in a violation of the Exchange Act may be subject to aiding-and-abetting liability.

Rescission Risks:  A violation of broker-dealer laws creates a right of rescission under federal and/or state securities law. The SEC or state securities regulators may require the issuer to offer investors rescission rights, and the issuer may be required to return the investment.

State Securities Violations:  Many states have begun reviewing state notice filings on Form D (which report transactions exempt from registration under Regulation D) and actively monitoring finder’s fees paid in connection with securities transactions. Some states have required issuers to provide additional information related to unlicensed broker-dealers and, in some cases, to certify that finder’s fees or commissions have only been paid in compliance with broker-dealer laws.

Accounting Liability Risk:  Auditors may raise accounting issues resulting from paying finder’s fees to unregistered broker-dealers and may require an issuer to account for potential liability arising from rescission rights.

The SEC has taken a limited no-action position that applies to certain unregistered “M&A brokers,” and some state securities laws accommodate this kind of arrangement as well – but otherwise, paying transaction fees to an unregistered broker-dealer can ruin everybody’s day.

– John Jenkins