SEC Ranieri Case: The Consequences of Being an Unregistered Finder
The Securities and Exchange Commission (SEC) recently brought charges against a New York-based private equity firm, Ranieri Partners LLC, after determining that a close friend of the firm's managing director, who had been acting as a "finder" for the firm, was an unregistered broker. The settlement arranged last month required William M. Stephens, the finder, to pay approximately $2.83 million in disgorgement and prejudgment interest. Additionally, the fund manager and the fund's managing director agreed to pay $375,000 and $75,000 in penalties, respectively.
This update provides a general overview regarding the payment of "finder's fees," and discusses when finder activities require registration as a broker-dealer. A finder cannot "induce or attempt to induce the purchase or sale" of any security without registering as a broker-dealer. To avoid registering, a finder should receive a flat fee and restrict his/her activities to introducing issuers and potential investors. If a firm wants the finder to solicit investors, perform analysis of either potential investors and/or the firm, or provide potential investors with information regarding the firm, it should retain a registered broker.
Broker Versus Merely a Finder
The distinction between a broker and a finder is important. A "broker" is any person engaged in the business of effecting transactions in securities for the account of others. Someone who takes steps to induce or bring about a transaction is a broker. A "finder" is someone who finds, introduces and brings parties together for a transaction. A finder leaves the negotiation and consummation of the transaction to the parties themselves.
Activities and Actions to Consider When Using a Finder
Generally, the SEC's determination of whether or not broker-dealer registration is required focuses on whether compensation is transaction-based. The SEC has indicated that registration helps ensure persons with a "salesman's stake" in a securities transaction operate in a manner consistent with consumer protection standards governing broker-dealers, such as sales practice rules. Additionally, the SEC staff looks at whether an individual is "effectuating" transactions.
The SEC considers the following to be broker activities:
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