I’m attorney Laura Anthony founding partner
of Legal & Compliance, a full service corporate,
securities, and business transactions law
firm.
Today is the continuation in a LawCast series
talking about finder fees.
Broker-dealers, in general, lack an incentive
to engage in small private capital-raising
transactions.
In addition to regulatory and liability concerns,
the amount of a capital raise by a small and
emerging company is often less, say about
$5 million than for a larger company and accordingly,
the potential commission for a broker-dealer
is limited as compared to the time and risk
associated with the transaction.
Most small and middle market bankers have
base-level criteria for acting as a placement
agent in a deal.
That criteria includes the amount of commission
they would need to collect in order to become
engaged.
From a regulatory perspective, when acting
as a placement agent in a private offering,
broker-dealers must consider FINRA filing
rules, general know-your-customer rules, suitability
standards, as well as statutory liability
under Dodd-Frank and the SEC antifraud provisions.
Even when a broker agrees to act as placement
agent, it can often be difficult to locate
investors for small or emerging or start-up
companies.
It would be helpful if unlicensed individuals
could refer investors to the broker-dealer,
who would then ensure that proper disclosure
has been made to the investor, and that the
investment is suitable for such investment.
However, FINRA Rule 2040 prohibits the payment
of transaction-based compensation by member
firms to unregistered persons.
FINRA Rule 2040 expressly correlates with
Section 15(a) of the Securities Exchange Act
and prohibits the payment of transaction-related
compensation unless a person is licensed or
properly exempt from such licensing.
Rule 2040 prohibits member firms from directly
or indirectly paying any compensation, fees,
concessions, discounts or commissions to:
(1) any person that is not registered as a
broker-dealer under Securities Exchange Act
Section 15(a) but, by reason of receipt of
any such payments and the activities related
thereto, is required to be so registered under
applicable federal securities laws and Securities
Exchange Act rules and regulations; or (2),
any appropriately registered associated person,
unless such payment complies with all applicable
federal securities laws, FINRA rules Securities
Exchange Act rules and regulations.
FINRA guidance on the Rule states that a member
firm can: rely on published releases, no-action
letters or interpretations from the SEC staff
in determining when a payment can be made,
can seek no SEC no-action relief itself; or
(iii) obtain a legal opinion from an independent,
reputable U.S. licensed attorney knowledgeable
in the area.
This list is not exclusive and FINRA specifically
indicates that member firms can take any other
reasonable inquiry or action in determining
whether a transaction fee can be paid to an
unlicensed person, in any given scenario.
FINRA Rule 2040 specifically allows the payment
of finders’ fees to unregistered foreign
finders where the finder’s sole involvement
is the initial referral to a member firm of
non-U.S. customers and certain conditions
are met, including but not limited to that
the person is not otherwise required to be
registered as a broker-dealer in the U.S.,
the compensation does not violate foreign
law.
the finder is a foreign national domiciled
abroad, the customers are foreign nationals
domiciled abroad, the payment of the finder’s
fee is disclosed to the customer, the customers
provide written acknowledgment of receipt
of the notice related to the payment of the
fee, proper records regarding the payments
are maintained, and each transaction confirm
indicates that the finder’s fee is being
paid.
In other words, finders’ fees can generally
be paid for regulation S and 144-A transactions
but not for U.S. based other Reg D transactions.
I’m securities attorney Laura Anthony, founding
partner of Legal & Compliance, and producer
of LawCast.
Should you have any questions about today’s
topic, please visit SecuritiesLawBlog.com
and LawCast.com, or contact me directly.
Inquiries of a technical nature are always
encouraged.
