FIVE FACTS AN ISSUER SHOULD CONSIDER BEFORE PAYING A FINDER’S FEE

For reasonable cost, simplicity and convenience, the appeal to a securities Issuer of a finder’s fee for capital raised sounds tempting.

Hungry to raise capital, fledgling securities Issuers, however, may leap too quickly at promises for lowcost investor introductions by engaging unregistered finders1 with uncertain expertise. Issuers seeking investor introductions by engaging finders are often conducting the sale of Non-Public Private Placement offerings based on an exemption from the registration requirements of Section 5 of the Securities Act of 1933 (“Securities Act”). Regulation D Rules 504, 505 and 5062 provide exemptions from the registration requirements of the Securities Act, allowing some Issuers to offer and sell their securities without having to register the securities with the SEC. 

Finders may be the capital raiser of choice for early-stage companies, or, as the U.S. Securities and Exchange Commission (“SEC”) believes they may be unregistered broker-dealers. Finders raise capital for Issuers that might not otherwise have capital on their own or, more importantly, would not draw the attention of investment bankers, who by definition are licensed broker-dealers. Finders and those who employ them must be aware of the risks associated with their services and the requirements imposed on them by the federal securities laws. Issuers or individuals who intend to use a finder—or those engaged as one—must be aware that certain activities require registration, the lack of which may bring

about serious consequences.

More articles on Securities Alerts and Issues can be found in our Securities Alerts: SEC & FINRA Section