Following the SEC’s proposed conditional exemption for finders (see HERE), I’ve been writing a series of blogs on the topic of finders. New York recently proposed, then failed to adopt a new finder’s regulatory regime. California and Texas remain the only two states with such allowing finders for intra-state offerings. Also, a question that has arisen several times recently is whether an unregistered person can assist a U.S. company in capital raising transactions outside the U.S. under Regulation S, which I addressed in the second blog in this series (see HERE). This blog will discuss the New York, California and Texas rules.
On December 1, 2020, the state of New York adopted an overhaul to some of its securities laws including modernizing registration and filing requirements with the Investor Protection Bureau and the Office of the Attorney General. Although the proposed rules would have adopted a new definition of “finder” and required licensing and examinations for such activity, the final rule release dropped the proposal without explanation.
Putting aside finders, an important aspect of the new rules is that companies conducting Rule 506 offering in New York will now need to file a completed Form D through the NASAA electronic filing depository. Prior to the new rules, New York’s Martin Act was very unclear on filing requirements and as a result, most practitioners simply did not file any notice documents or pay any fees where the offering pre-empted state law under the NSMIA (see HERE). This position was supported by an interpretive opinion published by the New York State Bar Association. Under the new rules, it is clear that a Form D is required, aligning New York with federal and other state notice provisions.
Historically, the Martin Act has not required the registration of securities, other than securities sold in real estate offerings, theatrical syndications or intra-state offerings. Instead, it requires that issuers register as dealers. In particular, the Martin Act requires that any person “engaged in the business of buying and selling securities from or to the public” register as a broker-dealer. New York exempted issuers from registering as dealers when they complete a firm commitment underwritten offering but not in other circumstances, including a best efforts underwritten offering or where no underwriter or placement agent is utilized.
The amended rules maintain this regulatory framework while expanding the definition of dealer and attempting to align, at least somewhat, the Martin Act with the federal framework involving covered securities. In particular, the new rules separate out dealers, and thus the forms necessary to file, into (i) Federal Regulation D Covered Securities Dealers; (ii) Federal Tier 2 Dealers; (iii) Federal Covered Investment Company Dealers; (iv) real estate dealers; and (v) all others.
In essence, the amended rules separate “dealers” that participate in federally covered transactions from those that do not. A Federal Regulation D Covered Securities Dealers must file a Form D. The new rules specify that the information in the Form D is all the information necessary to be filed by this category of dealer. A Federal Tier 2 Dealer must file a Uniform Notice Filing of Regulation A – Tier 2 Offering Form, which contains all the necessary information for that category of dealer. Finally, a Federal Covered Investment Company Dealer must file a Form N.
The New York rules did not proceed to provide a definition for “finders” but still require that “broker-dealers” that are not associated with a broker-dealer registered with the SEC or a member of FINRA be registered in New York to engage in broker-dealer activity. Of course, it still leaves the gaping question as to whether finder activity is broker-dealer activity requiring registration.
California Corporation’s Code Section 25206.1 permits the payment of a fee to finders for transactions involving intra-state offerings with California issuers subject to numerous conditions. In particular, a finder may be paid direct or indirect compensation if:
- The finder is a natural person;
- The finder only introduces accredited investors as defined by Rule 501 of the Securities Act (see HERE);
- The issuer and the transaction are in California exclusively (if an issuer is relying on a federal exemption other than one that nods to state law such as intra-state offering, the federal law would conflict);
- The securities purchase price cannot exceed $15,000,000 in the aggregate;
- The finder cannot participate in negotiating any of the terms of the offer or sale of securities;
- The finder cannot advise any party to the transaction regarding the value of the securities or the advisability of investing in, purchasing, or selling the securities;
- The finder cannot conduct any due diligence on the part of any party to the transaction;
- The finder cannot offer for sale any securities in which they own, directly or indirectly;
- The finder cannot receive, directly or indirectly, possession or custody of any funds;
- The securities transaction must be qualified or exempt from qualification under California law;
- The finder can only disclose (a) the name, address and contact information of the issuer; (b) the name, type, price, and aggregate amount of any securities being offered; and (c) 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;
- Concurrently with each introduction, the finder shall obtain the informed, written consent of each person introduced or referred by the finder to an issuer, in a written agreement signed by the finder, the issuer, and the person introduced or referred, disclosing the following: (a) the type and amount of compensation that has been or will be paid to the finder; (b) the finder is not providing advice to the issuer or any person introduced or referred by the finder as to the value of the securities or as to the advisability of investing in, purchasing, or selling the securities; (c) whether the finder is also an owner, directly or indirectly, of the securities being offered or sold; (d) any actual or potential conflict of interest; (e) that the parties to the agreement have the right to pursue any available remedies for breach of the agreement; and (f) a representation that the person being introduced is accredited; and
- The finder must keep all records related to the transaction for five years.
Texas has a state finder’s registration process which is less onerous than full broker-dealer registration. A finder registers in Texas by filing a Form BD and Form U-4 with the state. A finder must be a natural person and cannot have agents working on their behalf.
Like California, even if registered, a finder’s activities are limited are subject to numerous conditions. Texas finders are strictly limited to dealing with accredited investors. Further, like California, a Texas finder would only be able to be compensated or operate in regard to Texas-based intra-state offerings or the activity would run afoul of federal securities laws.
Rule 115 of the Texas State Securities Board defines a “finder” as “[A]n individual who receives compensation for introducing an accredited investor to an issuer or an issuer to an accredited investor solely for the purpose of a potential investment in the securities of the issuer, but does not participate in negotiating any of the terms of an investment and does not give advice to any such parties regarding the advantages or disadvantages of entering into an investment, and conducts this activity in accordance with §115.11 of this title (relating to Finder Registration and Activities). Note that an individual registered as a finder is not permitted to register in any other capacity; however, a registered general dealer is allowed to engage in finder activity without separate registration as a finder.”
in turn prohibits a finder from: (i) participating in negotiating any terms of an investment; (ii) giving advice to an accredited investor or an issuer regarding the advantages or disadvantages of entering into an investment; (iii) conducting due diligence on behalf of a potential issuer or investor; (iv) providing a valuation or other analysis to an issuer or investor; (v) advertising to seek investors or issuers; (vi) having custody of an investor’s funds or securities; (vii) serving as escrow agent for the parties; or (viii) disclosing information to an investor or issuer other than as specified in parts (b) and (c) of the rule.
Rule 115.11(b) in turn requires that a finder disclose the following to each accredited investor: (i) that compensation will be paid to the finder; (ii) that the finder can neither recommend nor advise the investor with respect to the offering; and (iii) any potential conflict of interest in connection with the finder’s activity.
Rule 115.11(c) enumerates permitted finders’ disclosures, including: (i) the name, address and telephone number of the issuer; (ii) the name and a brief description of the security to be issued; (iii) the price of the security; (iv) a brief description of the business of the issuer in 25 words or less; (v) the type, number and aggregate amount of securities being offered; and (vi) the name, address, and telephone number of the person to contact for additional information.
Rule 115.11(d) contains specific detailed record-keeping requirements for finders. Records are required to be kept for five years and must be segregated from any other records the finder may maintain.
Securities attorney Laura Anthony and her experienced legal team provide ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded public companies as well as private companies going public on the Nasdaq, NYSE American or over-the-counter market, such as the OTCQB and OTCQX. For more than two decades Anthony L.G., PLLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker-dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions, securities token offerings and initial coin offerings, Regulation A/A+ offerings, as well as registration statements on Forms S-1, S-3, S-8 and merger registrations on Form S-4; compliance with the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers; applications to and compliance with the corporate governance requirements of securities exchanges including Nasdaq and NYSE American; general corporate; and general contract and business transactions. Ms. Anthony and her firm represent both target and acquiring companies in merger and acquisition transactions, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. The ALG legal team assists Pubcos in complying with the requirements of federal and state securities laws and SROs such as FINRA for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the small-cap and middle market’s top source for industry news, and the producer and host of LawCast.com, Corporate Finance in Focus. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
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