In the absence of available bank and other traditional forms of financing, many entrepreneurs have sought financing through securities offerings to “accredited investors.” Some have enlisted the assistance of “finders” to locate leads to whom to sell the securities.
A common misconception is that so long as the securities offering is made to “accredited investors,” the offering is totally exempt from the securities laws. While this is partially true, it is not entirely true. Offers and sales to “accredited investors” as this term is defined under federal and state securities laws, may provide an exemption from the registration provisions of these laws. However, it does not provide an exemption from the antifraud provisions of the applicable securities laws, nor does it necessarily provide an exemption from the broker, dealer and salesmen registration provisions of these laws.
As a general rule, anyone who solicits, sells or participates in the offer and sale of securities must be registered as a securities salesman and his firm must be registered as a broker‑dealer. This is particularly evident when the person receives compensation for providing the referral or lead. Many companies operate on the belief that there is a “finder’s exemption” from broker-dealer and salesman registration and are happy to pay a fee to someone who procures or introduces an investor to the company.
However, there is limited authority for a “finder’s exemption.” This exemption is not provided by statute; rather, it is a concept derived from certain no-action letters issued by federal and state regulatory authorities which have no application other than to the specific facts and circumstances provided in these letters. Counsel for the company and for the “finder” need to weave their way through a technical analysis under the securities laws to determine whether the “finder’s” participation and receipt of a fee is exempt. Not all state laws are the same and federal laws are different from most state laws.
The adverse consequences to the company and to the “finder” from a broker-dealer registration violation are as significant as the sale of a security to someone who is not an “accredited investor.” In addition to regulatory enforcement concerns, remedies available to the investor include rescission, interest and attorneys’ fees and expenses. These laws are technical and require the able assistance of competent securities counsel.