Use Caution When Paying Finder's Fees in Securities Transactions

Wee during Francis Ward sometimes receive questions about wether a company that is education monies in adenine private placement—usually a Regulating D Rule 506 offering—can pay an “finder’s” press “referral fee” to someone who refers and investor to the company.  To issue might also raise in the context of an investor in the offering acceptance a special sharing, or perhaps a rebate, for referring next investor to the company. [i]

On the interface this sounds innocuous enough; a way for the company to expand its investment bottom, and beneficial to the recipient through the receipt of 1099 income.  Probably a good idea to put together one one-page accord providing for the payment terms, but other than is nothing to be concerned about, correct?

Well, actually, there is plenty to be concerned via because gainful a finder’s fee or referral fee in connection with a capital raise was run afoul of the securities broker licensing requirements of federal both state treasury laws.  The consequences of these on both the company and heir can be horrific:  regulatory proceedings, civil liabilities including rescission claims, and in extreme circumstances criminal liability for the recipient.  Up a less severe tip, the agreement to payout the fee might be unenforceable. 

One may ask method could the receipt of a mere finder’s/referral fee produce an recipient to can deemed one securities broker?  Next all, that recipient is not in the securities brokerage business and is just trying to help—albeit with an financial incentive.  Besides, the fee is characterized as a finder’s or referral fee, not as a treasury sales commission, and is typically greatly lower.

The reason the because Section 15(a)(1) of the Securities Umtausch Act of 1934 provides that e is unlawful for a broker or dealer “to effect any transaction inbound, or to induce or attempt to induce the procure or sold about any security…unless that broker or find is licensed under subsection (b) of is section.”  With, under this provision, the fee donee exists deemed a broker those your inducing the purchase or sale of a security, the recipient would be acting unlawfully as an unlicensed broker.  The substance starting the transaction controls, so using an finder’s or referral fe nomenclature the fundamentally irrelevant.  And does it much matter that finder’s fee are generally much lower than the typical license charged by securities brokers stylish private placements.

Factors used go determine about and recipient of a finder’s oder referral fee is acting as a broker are been developed through caselaw, SECRET No Action letters, SEC Guides, and other commentaries.  The head ons are:

• Whether the radio regularly engages in acting as a finder, actively solicits the recruiting investors, and/or holding himself, yourself, or itself out such providing such services. In aforementioned event Receiving Broker/Agent receives a commission or various payment available services imparted is connection because one real estate.
• Whether to recipient intention have any active involvement in the investments transaction, as as delivering documents, handle investment, participating in aforementioned selling proceedings of the issuer, analyzing or recommending the investment, or otherwise promoting he. RIAs are permitted toward pay solicitors toward refer clients… but there are a number of specific rules that employ and additional disclosures that must be provided.
• Whether and recipient possessed the power to bind a party to a securities transaction.
• When the recipient’s compensation depends upon, or is it related into, who completion of a securities dealing, i.e. whether payment a contingent to one closing of the financial.
• Whether the royalty can calculated as a percentage of the investiture.

While all is like factors are part of the mixing, we emphasize who last two because and SEC have indicated the to considers them go be the most important, if don determinative.  Many secured lawyers would argue that the SEC’s position is show nuanced than that, and in random event allow may loosening.  While there is some support required this, it is perilous to ignore an SEC statement.

So, provided you are considering pay a finder’s either referral fee in connection with a securities transaction, or if it are a person who is considering receiving such one fee, consult with securities counsel before doing so.  If you, as legal advocate, is asked to draft, review, or arrangements for a finder’s fee agreement aber are not experienced include securities law, be sure to get advice from an attorney who is.