Its no secret that both private and public companies, large or small have challenges raising much needed capital from investors. Access to equity can be difficult when complying with a maze of state and federal rules and regulations. Business owners seeking assistance in raising funds can be overwhelmed and confused and thus, an unlicensed “Finder” that provides much needed relief may feel like a super-money-man. But, issuer beware!
So what is a Finder? Generally, a Finder is someone who makes introductions between investors and companies through their extensive professional and social network, hopefully resulting in an investment- independent from the Finder him or herself. Finders are generally not allowed to:
- pitch or sell for the company;
- develop deal or investment terms; and/ or
- negotiate or represent the company;
- receive compensation for their services, particularly a percentage of money raised.
In order to conduct those types of activities, state and federal law require the individuals to be licensed- a licensed broker-dealer.
Why must is be a licensed broker-dealer you ask? In short, to protect potential investors from abusive, misleading or fraudulent sales practices. Licensed broker-dealers are required to conduct a reasonable investigation into both the securities that they offer and the company offering those securities. They are required to evaluate whether the securities and the issuer are a suitable match.
Uh-oh! what if you have utilized the services of a finder who has done any of the above in connection with an offering or investment? Well, if a company uses the services of an unlicensed finder when a licensed broker-dealer is required;
- the investors may be able to rescind their investment;
- the company may be at risk for civil and criminal penalties; and/or
- the company may be limited in their ability to raise capital in the future.
But we are too small, you say! Well, slightly true; there are few licensed broker-dealers that will provide their time and services related to offerings below $5,000,000 in value. The potential risks and modest compensation related to smaller offerings leaves little incentive for broker-dealers to assist. However, they do exist!
To view a listing of licensed broker-dealers, complete with broker-dealer history, click here .
Author: Jennifer Trowbridge, Stoecklein Law Group, LLP