Legal Perspective

Be Careful in Using 'Finders' to Raise Money
By Mark Hanson, Todd Guerrero & Joe Humke | March 01, 2005
The Securities Exchange Act of 1934 generally requires broker-dealers-persons engaged in "effecting" securities transactions-to be registered with the Securities and Exchange Commission (SEC). The laws of many states contain similar registration requirements that, because of their varying coverage, are not addressed here. The act of "effecting" a securities transaction is critical, as it determines who is and who is not a broker-dealer and, in turn, who is and who is not required to register as such under the Securities Exchange Act.

With an ever-increasing number of businesses competing for discriminating investor dollars, so-called "finders"-individuals who introduce potential investors to companies seeking financing-are in great demand. Due to the limited scope of finders' activities, they are not considered to "effect" transactions in securities and, therefore, are not required to register as broker-dealers. Sometimes, however, a finder will engage in activities that go beyond what is traditionally associated with finder conduct. This can spell disaster not only for the finder, but also for the company it represents, potentially resulting in rescission of the issuer's offering and a return of the investors' money.

Among the roles filled by finders, they, like broker-dealers, match investors with businesses seeking financing. The degree to which finders on the one hand, and broker-dealers on the other, engage in this matchmaking service is what sets them apart. A finder might best beviewed as someone who performs some of the services of a broker-dealer without sufficiently undertaking enough of them to "effect" a securities transaction and fall within definition of a broker-dealer. Quite naturally, then, a business seeking to determine whether it is engaging a finder should analyze the purported finder's activities vis-a-vis the standard for identifying broker-dealers.

Generally, five hallmarks have emerged which are commonly associated with "effecting" a securities transaction and acting as a broker-dealer:

1) Receiving transaction-based compensation (i.e., a commission)

2) Being involved in negotiations between an issuer and investors

3) Discussing details concerning, or making recommendations regarding, securities

4) Being involved in repeated transactions in securities

5) Providing add-on services to an issuer (e.g., conducting financial analyses, etc.)

It is unclear whether a finder's involvement in any one of these five activities, standing alone, will automatically render the finder a broker-dealer. What is apparent, however, is that securities regulators are getting more stringent with their finder standards as the breadth of securities-related services-and the persons offering them-increases.

An issuer can suffer dire consequences if it engages a finder that, due to its activities, turns out to be an unregistered broker-dealer. Indeed, if a company is involved in a securities transaction and engages an unregistered finder to conduct activities that should only be undertaken by a registered broker-dealer, it is possible that the issuer may be required to offer each investor in the offering a right to rescind their investment.

Issuers can take a number of measures to protect themselves. These include entering into a comprehensive engagement agreement with the finder, making proper disclosure of the finder's conduct in the issuer's offering documents, and doing a background check on the finder. If a business is engaged in a securities transaction and intends to use a finder or similar person to connect with potential investors, it is important that a legal advisor is contacted to determine the risks and protections available.


Mark Hanson and Todd Guerrero are members of the agribusiness and alternative energy practice group of Lindquist & Vennum PLLP, a leading provider of legal assistance on bioenergy projects throughout the country. Joe Humke, a corporate business partner at Lindquist & Vennum, contributed to this article. They can be reached at (612) 371-3211.
 
 
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