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Federal and State Securities Law on Finders, Brokers, and Finder’s Fees

Mon, 19 Mar 2012 10:48:35 GMT

James C. Brennan, Esquire and Hannah Terhune, Esquire ©2011
Capital Management Services Group

Finder Generally:

Federal and State securities law recognizes a finder as "someone who finds, interests, introduces and brings parties together for a business transaction that the parties themselves negotiate and consummate."  Unlike a broker, a finder has no duty to bring the parties to an agreement, but instead acts as an intermediary or middleman.   Finders find potential buyers or sellers, stimulate interest and bring parties together.  Brokers bring the parties to an agreement on particular terms."  In the corporate financing context, a finder's compensation is generally based on a percentage of the amount invested by one party or, in circumstances involving mergers and acquisitions, a percentage of the transaction value.

When A Finder Must Register As A Broker-Dealer, Or Use A Broker-Dealer:

The federal securities laws generally govern whether a finder must register as a broker-dealer, or conduct its activities through a registered broker-dealer.  Section 3(a) (4) of the Exchange Act defines "broker" as "any person engaged in the business of effecting transactions in securities for the account of others." Section 3(a) (5) of the Exchange Act defines "dealer" as "any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise." Section 15(a)(1) of the Securities Exchange Act of 1934 (the "Exchange Act") provides that it is unlawful for any broker or dealer to effect any transaction in, or to induce or attempt to induce the purchase or sale of, any security unless such broker or dealer is registered with the Securities & Exchange Commission.

Difference Between Broker Versus And An Intermediary:

As one commentator has noted, although a pure finder may "induce the purchase or sale of" a security within the meaning of Section 15(a) (1), he or she is not normally a "broker" because he or she effects no transactions.  In addition, the staff of the Securities and Exchange Commission has issued certain no-action letters further interpreting these provisions.  For example, in a no-action letter the staff explained:

[A]n intermediary who did nothing more than bring merger or acquisition-minded people or entities together and did not participate in negotiations or settlements between them probably would not be a broker in securities and not subject to the registration requirements of Section 15 of the Exchange Act; on the other hand, an intermediary who plays an integral role in negotiating and effecting mergers or acquisitions that involve transactions in securities generally would be deemed to be a broker and required to register with the Commission.

In light of the SEC's no-action letter, potential finders should be wary of performing anything more than an intermediary role in bringing parties together for the purposes of consummating business transactions involving the purchase or sale of securities, otherwise they run the risk of being deemed unregistered brokers pursuant to the federal securities laws.  In particular, finders should avoid offering investment advice in connection with their services.  Accordingly, finders and drafters of finder's fee agreements should preliminarily determine what the finder's role will be in connection with any potential finder's arrangement.  Furthermore, finders and drafters of finder's fee agreements should explore whether the finder's role will be restricted to merely bringing two parties together for a business transaction or whether the finder will assume a more active role in negotiating and structuring the ultimate financing arrangement.  Only by examining the finder's duties can the practitioner determine whether the finder must register as a broker pursuant to the federal securities laws.

While the use of finder's fee agreements have become commonplace, finders and practitioners alike must be wary of potential pitfalls that may arise from such agreements.  Before drafting any finder's agreement, the practitioner should first determine the extent of the finder's role in consummating the transaction at issue.  In addition, the practitioner should evaluate whether the finder may be subject to regulation under the federal securities law.  Finally, after the practitioner has addressed these considerations, the practitioner may want to include a provision in the finder's fee agreement to ensure that the finder will be compensated from transactions that culminated from a chain of introductions initiated by the finder.

About the Authors:

James C. Brennan, J.D., is an experienced trial attorney in practice for 30 years. Jim provides risk analysis and other advice and professional services to the global hedge fund community. Jim served with the United States Department of Justice in Washington, D.C. as a Trial Attorney from 1982 through 2006. There he handled all phases of complex litigation. From 1975 through 1982, Jim was an analyst in the Counter-Intelligence Division of Federal Bureau of Investigation in Washington, D.C. Jim is a welcome addition to Capital Management Services Group and brings a wealth of expertise, counsel, and wisdom to our practice.  Jim received his Juris Doctor in 1982 from George Mason University School of Law, located in Arlington, Virginia. He graduated from King's College, located in Wilkes-Barre, Pennsylvania, in 1975 with a B.A. in Government.

Hannah Terhune, J.D., LL.M, has nearly twenty years of solid experience working closely with people and businesses as an international tax and investment law (private investment fund) attorney.  Her prior professional experience includes working as a tax law expert with two of the largest accounting firms in the world and with the United States Tax Court.  She has an advanced law degree in taxation from The New York University School of Law (Legum Magister 1991) and a law degree from George Mason University (Juris Doctor 1989).  She has a Bachelor of Arts degree in Communications from The American University (1985).  She has served as an Associate Lecturer in taxation and business at George Mason University in Virginia and at Catholic University in Washington, DC.  Her prior military service includes serving as Judge Advocate and Aide-de-Camp in the U.S. Army Special Forces.  She has numerous testimonials to her credit.  Ms. Terhune has written over 100 published articles and white papers on U.S. and offshore tax planning and private investment funds (hedge fund).

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