Partner, Sunny Barkats, quoted in “Finders Beware: Know the Law or Suffer the Penalties”


Compliance Guidelines Regulations Concept

(DGIwire)  Using a “finder” to identity potential business opportunities is pervasive throughout the securities industry, particularly by small issuers interested in raising capital. Because of their size, and newness to public markets, many smaller companies are either “shut out” from access to traditional Wall Street Institutions or they simply don’t know the depth of the rules as well as the severity of the consequences for breaking them.

For smaller companies that are challenged with finding a traditional investment banking firm, using a finder often presents itself as an only option. When you are running a company that needs money to survive and grow, it’s often a finder that presents themselves as the pathway to that desired money.

In theory, the basic function of a finder is to bring parties together that will then themselves independently consummate a potential business or investment relationship. To the extent that the activities of the finder exceed the basic function of bringing a purchaser and a seller together, or go beyond a merely introductory role, the finder may be required to register as a broker-dealer under the Securities Act of 1934, as well as potentially be required to obtain a license to function as such under the blue-sky laws of the applicable jurisdiction.

Often people identifying themselves as finders, in fact are not registered or licensed, because they don’t know the rules, are ignoring them or due to the expense and a desire to avoid the considerable oversight and monitoring by the Financial Industry Regulatory Authority (“FINRA”.) Between this and other record keeping requirements and more, there’s a great attraction to maintaining an unregistered status—even when one is required to register under federal law or obtain a state license. However, consequences for those that ignore the rules and indulge in acting in an unregistered or unlicensed status may be vast—not only for the finder, but for parties in the business relationship with the finder.

“As the saying goes, ‘Ignorance of the law is no excuse.’ Although finders might seem like the only option to smaller public issuers, any wise issuer must consult an attorney to verify the legality of paying those finders. If such a finder is unregistered and acting outside of the FINRA or Securities & Exchange (SEC) guidelines, the money that looks accessible, might in actuality may never become available and the company could be left with crippling legal fees when it has to defend itself for breaking the law,” says Sunny J. Barkats, Esq., who is the author of The Use of Finders in the Securities Industry and was recently named one of the top corporate securities and finance attorneys in New York for 2014 by Thomson Reuter’s subsidiary Super Lawyers™.

In general, any involvement by a finder beyond a merely introductory role may subject that finder to registration requirements under both federal and blue-sky law.   Failure to register by a finder required to register may give rise to penalties, whether civil or criminal, for all parties. What should be particularly concerning to an issuer, is that a dissatisfied investor may invoke a finder’s failure to register as required by law as a means to unravel an offering or to obtain rescission over potentially depreciated securities.

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