In April of this year, the American Bar Association Private Placement Broker Task Force delivered to the SEC and published a recommendation for a limited federal exemption from SEC registration for securities intermediaries that would be able to assist in the private raise of capital for both private and public entities. The Task Force previously published a lengthy recommendation and even drafted proposed rules, in June 2005, and has been advocating the rules since that time. The full text of both the April 2012 submission and June 2005 report with proposed rules can be read on the SEC website.
The SEC’s Position and Current Rules on Finder’s Fees
The Securities and Exchange Commission (SEC) strictly prohibits the payments of commissions or other transaction based compensation to individuals or entities that assist in a capital raise, unless that entity is a licensed broker dealer.
Periodically, and most recently in April 2008, the SEC updates its Guide to Broker Dealer Registration explaining in detail the rules and regulations regarding the requirement that individuals and entities that engage in raising money for companies, must be licensed by the SEC as broker dealers. On a daily basis, hundreds if not thousands, of individuals and entities offer to raise money for companies as “finders” in return for a “finder’s fee.” Such agreements and transactions are prohibited and carry regulatory penalties for both the Company utilizing the finder’s services, and the finders.
Each of the following individuals and businesses are required to be registered as a broker if they are receiving transaction based compensation (i.e. a commission):
- “finders,” “business brokers,” and other individuals or entities that engage in the following activities:
- Finding investors or customers for, making referrals to, or splitting commissions with registered broker-dealers, investment companies (or mutual funds, including hedge funds) or other securities intermediaries;
- Finding investment banking clients for registered broker-dealers;
- Finding investors for “issuers” (entities issuing securities), even in a “consultant” capacity;
- Engaging in, or finding investors for, venture capital or “angel” financings, including private placements;
- Finding buyers and sellers of businesses (i.e., activities relating to mergers and acquisitions where securities are involved);
- investment advisers and financial consultants;
- persons that market real-estate investment interests, such as tenancy-in-common interests, that are securities;
- persons that act as “placement agents” for private placements of securities;
- persons that effect securities transactions for the account of others for a fee, even when those other people are friends or family members;
- persons that provide support services to registered broker-dealers; and
- persons that act as “independent contractors,” but are not “associated persons” of a broker-dealer (for information on “associated persons,” see below).
The SEC has been bringing actions against individuals and entities that violate these provisions and has indicating its intent to widen its enforcement efforts in this area.
An individual or entity may be able to collect compensation for acting as a finder as long as the compensation is not success or transaction based and the finder’s role is limited to making an introduction. The finder may not participate in negotiations, structuring or document preparation or execution.
An exception is that the federal securities laws do allow company officers, directors and employees to raise capital without being licensed as brokers. Company officers, directors and employees may engage in capital raising efforts, and receive compensation for their efforts, if such individuals: (i) are not subject to a statutory disqualification such as participation in securities activities for which they have been barred by a regulatory agency; (ii) the compensation is not a commission or other success based fee; (iii) the officer, director or employee performs, or is intended to perform at the end of the offering, substantial duties for or on behalf of the company otherwise than in connection with the offering; (iv) the officer, director or employee was not a broker or dealer, or an associated person of a broker or dealer, within the preceding 12 months; and (v) the officer, director or employee restricts his or her participation to any one or more of the following activities (a) preparing any written communication or delivering such communication through the mails or other means that does not involve oral solicitation by the officer, director or employee of a potential purchaser; Provided however, that the contents of such communication is approved by a partner, officer or director of the company; (b) responding to inquiries of potential purchaser in a communication initiated by the potential purchaser; Provided however, that the content of such responses are limited to information contained in a registration statement filed under the Securities Act of 1933 or other offering document; or (c) performing ministerial and clerical work involved in effecting any transaction.
The ABA’s Recommendation
The ABA is proposing an exemption from full broker dealer registration for what they are calling “securities intermediaries.” The ABA recognizes that the term “finder” carries a negative, if not illegal, connotation and thus the new terminology. Under the proposal, the securities intermediary would be exempt from full registration for such activities as arranging the purchase and sale of securities in private placements; making introductions to broker dealers and investment bankers; assisting in due diligence; deal structure; valuations and negotiating and obtaining financing.
The exemption, however, is only on the federal level. The SEC has indicated it would only consider the exemption if state regulators enacted a state registration regime. That is, securities intermediaries would be exempt from broker dealer registration and registration with the SEC (and therefore with FINRA) but would be required to register on the state level, in each state that they acted as a securities intermediary. Further, the SEC indicated it would also allow state registered finders or securities intermediaries to be compensated by FINRA members, a practice that is strictly prohibited today.
The ABA Task Force report believes that state registration will allow small companies to legally use intermediaries that are professional and somewhat regulated, to raise capital. The ABA proposes that the individual states set up a registration process, licensing requirements and procedures and examinations for securities intermediaries/finders. The SEC has indicated that a precondition would be bad actor qualifications, which is advocated in the ABA Task Force recommendation.
The Author
Laura Anthony, Esq.
Founding Partner
Legal & Compliance, LLC
Corporate, Securities and Going Public Attorneys
LAnthony@LegalAndCompliance.com
Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC 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 as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of 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; Regulation A/A+ offerings; 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 MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC 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 OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, 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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