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Think It's Found Money?
When a business needs to raise money it may consider hiring a 'finder,' which is normally a consultant that helps the company find investors in the business. The company should proceed with caution in retaining a finder due to the regulated nature of its business, and there are several 'market' terms in a written Finder's Fee Agreement that the company should insist upon.
Generally, a 'finder' or 'placement agent' receives a 'finder's fee' depending upon the amount of capital it introduces the Company to. The Securities and Exchange Commission ('SEC') has long regulated this practice and, depending upon a facts and circumstances test (known as the 'Issuer Exemption'), requires finders to be registered as broker-dealers under Section 15(a)(1) of the Securities Exchange Act of 1934. The factors the SEC considers for a finder to fall under the Issuer Exemption include:
- Is the finder is an employee or independent contractor of the company?
- Will the finder's compensation will be linked to the amount of securities sold or is it a fixed compensation?
- Does the finder devote a substantial portion of her time to rendering services for the company that are not related to the sale of securities?
- Does the finder intend to remain with the company after completion of the offering? and
- In the past, has the finder participated, or will the finder in the future participate, in other offerings by this or other companies?
The rationale for exempting finders from registration is that the finder is not a broker because she is not 'effecting' transactions for others. That is, the finder's activities are limited to identifying potential investors and introducing them to the Company. The negotiation of the investment terms, the theory goes, is strictly between the Company and the investor.
More likely than not, however, the 'finder' answers at least some of the foregoing questions in a manner requiring registration as a broker-dealer. What does this mean to the issuing company that hires an unregistered finder? It could mean that its exemption from registration of the offering is blown and the company is in violation of federal and state securities laws. It could also mean that the company is not allowed to accept the investments by the investors identified by the unregistered broker. In any case it could mean that state and federal securities regulatory agencies are investigating the business and affairs of the company, which could be quite uncomfortable for even the cleanest of businesses.
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