Saturday, February 10, 2007

When Raising Investment Cash for Your Biz, Can You Pay a Finder?

My clients regularly ask me whether they can pay a “finder’s fee”, a commission or a bonus to a third party or employee to help them sell shares of their company for the purpose of raising investment capital in their business. One of the biggest myths in the securities industry is that the payment of finder’s fees falls within a “gray area” of the law. In fact, there is no gray area and, in almost every case, the payment of a finder’s fee, a commission or a bonus in connection with a sale of securities to any person who is not a licensed broker or dealer violates State and Federal securities laws.

In years of practice, I have seen nearly every attempt at circumventing this rule, including so-called "consulting arrangements", employee "bonuses", calling the payment of the finder's fee or commission by other names, etc. The reality is, any payment to a person other than a licensed broker or dealer that is contingent upon the successful completion of the sale of securities is illegal.

Both the person AND entity paying the fee (the company and its officers), and the person or entity receiving the fee, will be subject to fines and other serious penalties. Additionally, securities regulators can force the company to offer to its shareholders the right to receive their investment money back (with interest)--which could be a big problem if you've already spent the cash in your business. And, in some cases, the payment of the finder's fee to a non-licensed person can be sufficient basis for a shareholder to sue the company for the return of his or her investment at a later date--a right they might not have otherwise had if you never paid the finder's fee.

For more information, see my article "Can You Accept (or Pay) a Fee for Finding Investors in a Securities Offering?".

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