Frustrated by a lack of federal response to lingering inaction, New York is adopting its own requirements regarding finders and the Colorado Securities Division has taken previous action against a finder.
By Dave Thayer
A while back I wrote an article regarding the problems relating to the use of “finders,” which focused on federal law and the Securities and Exchange Commission’s views on the issue (see SEC Calling: The Trouble with Finders in Connection with the Sales of Securities).
A “finder” is a person or entity that refers potential investors to a company issuing its own securities to raise capital, typically in connection with private offerings. The primary issue facing finders and the companies that engage them is whether the finders should be registered as broker-dealers under federal and state securities laws.
The issues with using finders in connection with capital raising activities has been a problem for years. In May of 2017, an advisory committee of the SEC on small and emerging companies noted in a letter to the SEC chairman that identifying potential investors is one of the most difficult challenges for small businesses trying to raise capital. It also referred to significant uncertainty in the marketplace about what activities require broker-dealer registration under Section 15 of the Securities Exchange Act of 1934. The letter noted that companies that want to play by the rules struggle to know in what circumstances they can engage a “finder” or platform that is not registered as a broker-dealer. To date, the SEC has not adopted any safe-harbor regulations relating to the use of finders.
The continued lack of concrete federal rules has evidently spurred the State of New York into action. New York’s securities and broker-dealer laws, known as the Martin Act, give the New York Attorney General (NYAG) expansive enforcement powers. Past NYAG’s have not been shy about using them, especially when the NYAG’s office has viewed federal law enforcement efforts as lacking. Past examples of aggressive enforcement actions have included actions against major Wall Street financial institutions and their executives and actions against banks, investment advisors and brokerages regarding mortgage-backed securities. Perhaps in keeping with New York’s frustration with the SEC’s lack of response to lingering problems, in early April 2020 the NYAG announced proposed amendments to the Martin Act which, in part, requires the registration of finders as securities brokers and dealers.
While Colorado does not have any specific regulations relating to finders, the Colorado Division of Securities will likely not be tolerant of the people or entities acting as unregistered finders and the issuers of securities who use unregistered finders, especially when their activities are excessive or public in nature (see Black Diamond Fund LLLP v. Joseph). Whether Colorado and the other states follow New York’s lead and adopt laws requiring the registration of finders as securities brokers and dealers remains to be seen.
Please feel free to consult with your Jones & Keller counselor before acting as, or engaging, a finder.
David A. Thayer, Esq., is a corporate and transaction attorney, and former CPA, who focuses on being a deal maker, not a deal breaker, as he helps clients achieve their business dreams. He can be reached at email@example.com.
This information is not intended as legal advice. Seek specific legal advice before acting.