Does your company offer a finder's fee for locating investors? If so, you may find that your finder's fee agreement may not be enforceable, a new article at Inside Counsel warns.
Companies that seek to raise money through a private securities offering routinely dole out finder's fees, attorney Randy Johnson writes for Inside Counsel. Finder's fees are usually determined by how much money the finder's efforts bring in for the company.
But a legal issue arises when the finder is not properly licensed as a broker-dealer. In that case, the finder's fee agreement "is an illegal contract and is likely unenforceable," Johnson writes for Inside Counsel.
A finder must be licensed as a broker-dealer pursuant to federal securities laws and the laws of your state, Johnson advises. In general, the Securities and Exchange Commission prohibits a person from “effecting transactions in securities” unless the person is licensed.
The SEC has not defined the scope of what it means by “effecting transactions in securities.” But according to Inside Counsel, the SEC has issued letters that shed light on what factors it considers in requiring a finder to be a licensed broker-dealer.
The SEC’s factors include whether the finder:
- Was involved in any previous sales of securities,
- Will get a transaction-based fee as compensation,
- Will discuss with potential investors the details of the offering, or
- Is involved in negotiations with the potential investors.
Using a finder who is not a licensed broker-dealer can lead to adverse consequences, Johnson warns. For example, if your company uses an unlicensed broker in its securities offering but fails to disclose this, investors may have a right to take back their investment.
Securities laws involving finder’s fees are complicated. Check out FindLaw’s Corporate Counsel Center for more tips and resources to stay current on this and other SEC-related topics.
- The Laws That Govern the Securities Industry (U.S. Securities and Exchange Commission)
- Finders’ Fees and Securities Laws (FindLaw)
- SEC Staff Announces Plan to Publicly Release Comment Letters and Responses (FindLaw)
- Corporate Counsel Center - Corporate Governance (FindLaw)