Does this sound familiar? XYZ Company is raising capital. XYZ hires Jenna, a well-connected individual in her community, to locate investors. She introduces the company to some affluent investors and helps facilitate the deal. XYZ pays her a finder’s fee.
Is Jenna acting as a broker-dealer without a license? Probably. Could the SEC or the California Department of Business Oversight fine her? Probably.
Even worse, her acting as a broker-dealer without a license gives the investors the right to ask for their money back.
Just a Finder?
But she was “just a finder,” the Company says, not a broker-dealer! This is a common myth in the business community. Companies think they can hire someone to find investors and pay them a finder’s fee, and if their business card and website don’t actually say “broker-dealer,” then they are “just a finder” and not a broker-dealer. Wrong. Whether someone is acting as a broker-dealer depends on what they do, not what their business card says. And while there has always been an exemption from broker-dealer licensing for someone who is a “true finder,” what it means to be a “true finder” has always been a gray area and difficult to prove. Until now.
The California legislature recently added Section 25206.1 to the California Corporations Code, defining the term “finder” and allowing people who jump through its hoops to avoid the requirement to register as a broker-dealer (at least under California law).
The requirements to comply with Section 25206.1 are numerous, but much less onerous than registering as a broker-dealer. And if the requirements allow the person to collect a finder’s fee (and the company to comply with the securities laws), they are probably worth it.
The New California Finder Law Requirements
- The finder must be a natural person, not an entity.
- The transaction must take place in California.
- The size of the transaction for which the finder is engaged must not exceed $15 million in the aggregate.
- The finder must not: (a) participate in negotiating any of the terms of the transaction, (b) advise any party regarding the value of the securities or the advisability of purchasing or selling in the securities, (c) conduct any due diligence for any party to the transaction, (d) sell any securities that are owned directly or indirectly by the finder, (e) receive possession or custody of any funds in the transaction, (f) participate in the transaction unless it is qualified by permit or exempt from qualification under California law, (g) make any disclosure to any potential purchaser of securities other than: (i) the name, address and contact information of the issuer; (ii) the name, type, price, and aggregate amount of the securities offered; (iii) the issuer’s industry, location and years in business.
- The finder must file, in advance of taking any finder’s fees, a statement of information with the finder’s name and address, together with a $300 filing fee, with the California Bureau of Business Oversight, and thereafter file annual renewal statements with a $275 filing fee and representations that the finder has complied with the exemption conditions.
- The finder must obtain a written agreement signed by the finder, the issuer and the person introduced by the finder, disclosing: (a) the type and amount of compensation that has been or will be paid to the finder, (b) that the finder is not providing advice to the issuer or any person introduced to the issuer as to the value of the securities or advisability of purchasing or selling them, (c) whether the finder is also an owner of the securities being sold, (d) any conflict of interest in connection with the finder’s activities, (e) that the parties have the right to pursue any available remedies for breach of the agreement, and (f) a representation by the investor that the investor is an “accredited investor” as defined in SEC Regulation D and consents to the payment of the finder’s fee.
- The finder must preserve copies of the notice, the written agreement and all other records relating to the transaction for a period of five years.
Note that the SEC has yet to jump on the finder bandwagon. And individuals must comply with both state and federal law in securities transactions. So even if a finder complies with Section 25206.1 in California, she could still find the SEC breathing down her neck for acting as a broker-dealer without a license. However, if she complies with Section 25206.1, there is a good chance she will be deemed to be acting as a “true finder” and not a broker-dealer.
Feel free to contact me if you have any questions about the new finder law.
This article is not intended and should not be relied upon as legal or tax advice pertaining to any specific matter. You are encouraged to seek competent legal and tax counsel before proceeding with any transaction involving any of the matters discussed above.