On Investment Platforms for Private Funds and Investment Platforms for Private Placements – SEC Update
Reporter: Aviva Lev-Ari, PhD, RN
The distinction between being classified as a finder and a broker-dealer can have significant consequences. An unregistered broker-dealer may face sanctions from the Securities and Exchange Commission (SEC), and it may be unable to enforce payment for its services. In addition, transactions involving an unregistered broker-dealer may create a right of rescission in favor of the investors, allowing the investors the right to require the issuer to return the money invested. One example of the consequences of an unregistered broker-dealer occurred in the Ranieri Partners SEC enforcement action. In that action the SEC brought charges against a private-equity firm, its managing director, and a consultant because of the consultant’s failure to register as a broker-dealer. The SEC’s order found that the private equity firm paid transaction-based fees to a consultant, who was not registered as a broker-dealer, for soliciting investors for private fund investments.1
The federal securities laws do not specifically define the term “finder” or outline what finders can do. Instead, finders must avoid being deemed a broker or dealer under the federal securities laws unless they register as such with the SEC and the Financial Industry Regulatory Authority (FINRA). A broker is defined as “any person engaged in the business of effecting transactions in securities for the accounts of others.”2 A dealer is defined as a person that is “engaged in the business of buying and selling securities … for such person’s own account,” but excludes a person that buys and sells securities for its own account, but not as part of a regular business.3Because the broker definition is the one that finders have the most trouble with, this discussion is focused on what activities may cause a finder to fall within the definition of a broker required to register with the SEC and FINRA.
- M&A Brokers
- FINRA Guidance
- Investment Platforms for Private Placements
- Investment Platforms for Private Funds
- Potential Regulatory Action
A determination of whether an intermediary is acting as a finder or an unregistered broker-dealer is a very fact-specific analysis and can often be very complex. Unfortunately for unwary entrepreneurs, company executives, and equity fund sponsors, frequently a third party assisting with capital-raising will be acting as a broker-dealer, not a finder, and therefore should not be engaged unless properly registered. It is likely that we will see further clarification or new rules from regulators in the future; regardless, it is important to always carefully consider the involvement of finders or broker-dealers in any capital-raising endeavor.
If you have any questions regarding the use of finders, or capital raising in general, please contact the Venable lawyer with whom you work, one of the authors of this article, or a member of our Corporate Finance and Securities Group.