August 22, 2018
Everything You Always Wanted to Know about Finders (But Were Afraid to Ask)
The legality of arrangements with finders & unregistered brokers is a murky and complex area. Fortunately, this Venable memo provides a nice overview of the legal issues and the parameters of available exemptions. This excerpt provides an overview of some of the potential pitfalls of being classified as a unregistered broker under the federal securities laws:
The distinction between a finder and a broker-dealer as classified by the Securities and Exchange Commission can have significant consequences. An unregistered broker-dealer may face sanctions from the SEC, and it may be unable to enforce payment for its services. In addition, transactions involving an unregistered broker-dealer may create a right of rescission in favor of the investors, allowing the investors the right to require the issuer to return the money invested.
One example of the consequences of an unregistered broker-dealer occurred in the Ranieri Partners SEC enforcement action. In that action the SEC brought charges against a private-equity firm, its managing director, and a consultant because of the consultant’s failure to register as a broker-dealer. The SEC’s order found that the private equity firm paid transaction-based fees to a consultant, who was not registered as a broker-dealer, for soliciting investors for private fund investments.
The memo reviews the SEC’s guidance on the difference between “finders” and “brokers,” discusses federal and state securities law provisions relating to “M&A brokers,” reviews FINRA guidance and its regulatory relief for “Capital Acquisition Brokers,” and also addresses issues under the JOBS Act.
– John Jenkins