Brokers and Finders in Securities Law

Article #4 – Finders

In this series of articles, I explain the law of brokers and finders in selling securities.  My intended audience is the business owner who sells stock (or LLC interests) to raise capital for the business.  The articles deal generally with securities offerings (that is, private placements of securities) and specifically with the law of brokers and finders in the context of a securities offering. 

Where You Are in the Series

Article #1 in the series Overview, explains why you care about this subject.  In brief, you want to sell stock in your business and avoid registering as a broker or otherwise violating the broker laws.  You care because violating the broker laws will give your investors the ability to sue you and win.

In Articles #2 and 3, I applied the broker laws to you, the business owner, and your employees, directors, advisors etc.  In this final article, I explain how you can use other people to help sell your stock without violating the broker laws.

The articles in the series are:

Why Care About Finders?

Recall from previous articles that a person who sells your stock may not regularly engage in securities transactions, unless that person is a registered broker.  Most people who help you sell stock have not obtained their broker registration.  Therefore, you must be sure that they don’t regularly engage in selling stock.  This is where finders come in. 

By definition, a finder is not a broker.  A finder does not regularly engage in securities transactions.  Your job is to restrict the selling activities of your non-employee directors, advisors etc. so that they are finders, not brokers. 

How to be a Finder

A seller can limit his activities to that of a finder and avoid the requirement of registration as a broker.  How does he do it? – A finder makes an introduction and walks away.  The finder does not participate in the promotion, negotiation or sale of the securities. 

Specifically, the finder should not do any of the following:

* The finder should not advise the investor as to the merits of the transaction or the issuer, or provide detailed information to the investor.

* The finder should not participate in the negotiation or drafting of subscription documents. 

* The finder should not participate in the closing of the sale.

* The finder should not receive commissions based on the closing of sales, or otherwise be paid in a manner that would motivate the finder to encourage sales.  This usually is the hardest requirement to deal with.  The SEC looks favorably on flat fees paid to a finder solely for making the introduction, where the fee is not tied to the consummation of sales. 

* The finder should not have been involved in the past, or be involved on a regular basis now in the sale of securities. The SEC looks for prior or ongoing involvement in securities transactions.

Example – Paul Anka

A transaction involving Paul Anka (if you remember the singer) is useful to show the limits of what can be done.  In Paul Anka. SEC No-Action Letter (avail. July 24, 1991), the SEC permitted Paul Anka to receive a commission on the sale of units in the Ottawa Senators Hockey Club Limited Partnership, without registering as a broker-dealer.  Anka was a part owner of the issuer.  Anka received a 10% fee for sales made to investors found by Anka.  The primary factor in exempting Anka from registration as a broker was that Anka only provided names and numbers of persons with whom he had a pre-existing relationship and whom he reasonably believed to be accredited investors. Anka did not participate in any other manner whatsoever with the sale of securities, and did not make any recommendations to the potential investors.  In addition, Anka was not previously engaged in the offering of securities.

On that note, here ends my four part series on using brokers and finders in a securities offering.  I have only one more thing to say….

Get a Securities Lawyer

An offering of securities is complicated.  You must comply with a host of securities laws, of which broker laws form only a small part.  You can comply with the broker laws that I outline in these articles and still violate some other securities laws related to your offering.  You need a securities attorney to guide you through.  Feel free to call me if you have any questions or comments.

Call me to schedule a legal consultation: 510-796-9144