The SEC has recently begun taking an increased interest in enforcement actions against so-called “finders” that are, in the SEC’s judgment, actually unregistered brokers. At a basic level, the federal securities laws require anyone who solicits investments in return for transaction-based compensation to be registered as a broker.
Generally, no one who is not, at the very least, an employee of an issuer (in many cases, it should be officers or directors) should be doing the following unless they are a registered broker or associated with a registered broker: 1) acting as an independent consultant; 2) actively soliciting investors on behalf of a company issuing securities; 3) receiving transaction-based compensation for consultation or soliciting investment; or 4) sending prospectuses, subscription documents, or other due diligence materials to other investors.
Startups in particular should be wary of enlisting the services of a “finder” in their fundraising efforts. Utilizing an unregistered or unlicensed broker may invalidate the company’s use of many state and federal securities registrations exemptions (in fact, some exemptions do not permit the use of a broker, registered/licensed or not, at all). If the use of a “finder” invalidates an issuing company’s claimed exemption (with no safe harbor available), purchasers will normally be entitled to a right of recision (that is, a right to have the transaction reversed and their money returned), and the company (and potentially its principals) may be subject to fines and/or barred from further use of certain securities exemptions.