Finders may or may not be “brokers” under federal and state laws. If a finder is determined to be a broker, then the finder must be registered with the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”). If the finder is not registered as a broker with the SEC and FINRA, then the entire financing that the finder has helped to raise may be tainted, and could have serious consequences for the fund or startup. Therefore, before retaining a finder to help with a financing, the fund manager or startup should confirm that the finder is indeed registered as a broker, or is a registered representative of a broker.
FINRA’s website (www.finra.org) has a feature called “BrokerCheck” which provides information on brokers licensed with the SEC and FINRA. Type the name of the finder in the BrokerCheck box (knowing the middle name helps) and see if the name appears in the results. If the name does appear, it will indicate that the finder is either a “Broker” or “Not Licensed”. If the Broker is licensed, then the next step is to involve the attorneys to draft a finder’s agreement. If however, the search result indicates “Not Licensed” or “No Results,” then the finder is not registered and the fund manager or startup should probably not engage with this finder.
Consequences of Using an Unregistered Finder
The consequences of using an unregsitered finder can be severe as the offering may be tainted, which could lead to an unraveling of the offering, or returning money to investors, or in extreme cases, the bankruptcy of the entity.
The Gray Area
The law on finders is in flux. Some states, including California, are making it easier for finders to operate (subject to a number of restrictions and rules). In addition, the federal law is somewhat murky on this topic and open to interpretation. An unregistered finder may try to convince a fund manager or startup that the arrangement might be structured to navigate these murky waters. However, the SEC continues to be taking a pretty hard stance about unregistered finders acting as brokers, and so caution is urged.
The Bottom Line
The bottom line is that if an unregistered finder offers to assist with raising capital and will be paid based on the success and/or amount of the money raised, be very wary and involve legal counsel as soon as possible to analyze the situation.
DISCLAIMER: The above is not to be construed as legal advice. Consult your attorney.
SEC No-Action Letters regarding Broker-Dealers: https://www.sec.gov/divisions/marketreg/mr-noaction.shtml