“Now, you cooperate wid us and, uh, maybe we’ll cut choo in for a piece o’ dee action.” – Star Trek, A Piece of the Action (1968)

The business of America is business.

The Small Business Administration estimates that between 600,000 and 800,000 new businesses are formed every year in the United States – the exact number rises and falls as a function of the general state of the economy. Almost every single one of those new businesses struggles with the same fundamental problem — how to raise capital.

Since the time when people started needing capital, there’s been someone willing to help you get that capital.

For a price.

It seems that ever since the good entrepreneurs of this country first began trying to raise capital, there’s been someone nearby willing to lend a hand.   But here’s an important warning for all you entrepreneurs out there: if someone is going to help you raise that capital, you as a business owner or entrepreneur need to be careful about what you’re doing!

Particularly if the person who is going to help you raise that capital is getting paid to do so.

In the business, that guy who can find you the guy is called a finder. Under the law, to be paid as a finder, you need to be a broker-dealer.

A broker-dealer is “any person engaged in the business of effecting transactions for the account of others.” The Securities and Exchange Commission has taken an extremely broad view of actions that constitute actions of a broker and has held that even the presence of one of the hallmarks could be enough to find a person was “engaged in the business” and thus subject to registration.  Broker-dealers need to be registered with the Securities and Exchange Commission, FINRA, and state securities agencies.

Yeah, I know I should be registered as Broker-Dealer, but it doesn’t really matter.

Yes, it does matter. Registered Broker-Dealers are regulated by FINRA and FINRA keeps a file on each broker-dealer that you can review to make sure you are dealing with a good guy versus a not so good guy.

It is illegal for any finder to “effect any transaction in, induce or attempt to induce the purchase or sale of, any security” without first registering as a broker-dealer. The Securities and Exchange Commission has a broad definition of what it considers the “hallmarks” of unregistered broker activity. An unregistered broker may not:

• Receiving compensation contingent on the success or amount of a securities transaction or based on the amount or value of a securities transaction;
• Soliciting investors to enter into securities transactions;
• Assisting issuers in structuring prospective securities transactions or helping issuers to identify potential purchasers of securities; or
• Participating in the negotiating process or otherwise bringing buyers and sellers of securities together.

But how is someone to know? Just between us. Wink. Wink.

When an issuer raises money, the issuer must disclose payments to finder/broker-dealer on Form D. Form D is filed with the Securities and Exchange Commission. While forms with the Securities and Exchange Commission are not filed under penalty of perjury, not reporting carries with that failure a whole host of possible bad outcomes for the Issuer:

• Recession rights of investors- which can include interest and attorney fees (Section 29(b) of the Exchange Act – every contract made in violation of the Exchange Act, including contracts for which performance under the contract is a violation shall be void.
• Regulatory sanctions for employing an unregistered broker/dealer or for aiding and abetting the violation of federal and state law which could also include:
  • the issuer being unable to rely on certain securities exemptions,
  • imposition of fines, and
  • criminal penalties for the issuer and the officers/directors (Section 20(e) of the Exchange Act).
• 10b-5 violations- securities fraud for both the issuer and the officers/directors
• The issuer can be held responsible for the unregistered broker/dealers’ actions such as fraudulent misrepresentations.
• An inability for the issuer and shareholders to get attorney opinion letters.

And as if that isn’t reason enough for you as a business owner to be careful, consider this:  under recent decisions, the issuer and the officer can both be punished. http://www.sec.gov/litigation/admin/2013/34-69091.pdf

Yes, that’s true, but we can do a work around if I am an employee of the Issuer….

No work around exists. Section 3a4-1 has been referred to as a “finder’s exemption.” Under this finder’s “exemption” in very limited circumstances, an employee may not have to register as a broker. However, these “exemptions” are limited. The employee cannot be compensated in connection with the sale of securities and the Securities and Exchange Commission looks at compensation linked to success of investments, changes in compensation, bonuses, timing of compensation and employment dates. Further, the employee must have other substantial duties.

In sum, the exception is very narrow and only satisfied:  if, and only if (i) the employee is not compensated and has other substantial duties, (ii) the employee is not subject to a statutory disqualification, (iii) the employee is not be associated with a broker-dealer, and (iv) has not been a broker within the past twelve months.

The Securities and Exchange Commission has taken an extremely broad view of actions that constitute actions of a broker and has held that even the presence of one of the hallmarks could be enough to find a person was “engaged in the business” and thus subject to registration.