When entrepreneurs start companies and need funding, they may not have direct relationships with high net worth family and friends who can fund their business ventures. When this is the case, entrepreneurs often turn to individuals who can connect them with the investors that they need. These people are often referred to as “finders.”
Finders introduce entrepreneurs to potential investors in exchange for receiving a percentage (typically 5%- 7%) for each successful investment his or her connection makes in the company. Because they are so focused on doing whatever they can to raise capital for their start-up ventures, entrepreneurs are often unaware of that the finders are not properly registered as broker-dealers with the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (FINRA). Unfortunately, unregistered finders present risks that can destroy the dreams of the entrepreneurs who unknowingly seek their help.
The Securities Exchange Act of 1934 (the “Exchange Act”) requires registration of anyone “effecting transactions in securities” unless the person is licensed. The factors that the SEC uses to determine whether a finder should be licensed as a broker-dealer, include (without limitation):
• Will receive compensation based on the amount his or her investors invest in the company;
• Has been involved in the sale of securities before;
• Will discuss details relating to the offering with potential investors; and/or
• Will be involved in negotiations with the potential investors.
Using a finder who is not a licensed broker-dealer can greatly damage the finder and the company. These possible consequences include:
• Investors may have the right to take back their investment;
• Finder may incur significant fines;
• Companies may be limited in their ability to raise capital in the future; and
• Contracts with finders who are unlicensed may be considered void.
The general rule to follow is for the role of the finder in a securities transaction to end once the initial introduction has been made. The more involved the finder is in the process, the more likely the finder will be required to be a registered broker with the SEC.
There are a few exceptions to the activities an unregistered finder is allowed to partake in, such as identifying sources of capital, preparation of business plans, or certain financial services.
Raising capital is a vital part of the growth of a business, but when using a finder, it is imperative to ensure that both the company and the finder are complying with federal and state laws in order to prevent costly liability.
Disclaimer: This article should only be used for informational purposes. It does not constitute legal advice, and it does not create an attorney-client relationship with anyone. If you need legal advice, please feel free to contact me at 404-419-6571 or
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or consult an experienced attorney in your community.
