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Finders: Friend or Foe of Issuers?

Ventures And Intellectual Property Group Letter

Fourth Quarter 2003

Authors: Donna L. Brooks

Connections to Capital

Your company needs cash for working capital. You have “friends in high places” who would be willing to hook you up with some sources of capital so long as you pay them a success fee when you close your next round of equity financing for capital you raise from the sources they identified.

You can’t wait to have them help you since capital has been tight. After all, you don’t have to pay them anything unless you actually close a deal and get the money. What could be better, right?

While it sounds great to get the money your company needs, you should take a step back and assess the risks. Your well connected friends (we’ll call them “finders”) may well be engaged in activities that would constitute them broker-dealers and/or investment advisers, and if they are not properly registered under applicable securities laws, they can cause some major headaches for issuers (your company).

Broker-Dealers, Investment Advisers and Agents

The securities laws do not define “finder.” However, a “broker” is a person who is engaged in the business of effecting transactions in securities (note that compensation is not an element of the definition), and an “investment adviser” is a person who, for compensation, engages in the business of advising others as to the value of securities or the advisability of investing in or buying or selling securities. Many states, like Connecticut, also have the concept of an “agent” which is a person who represents an issuer in effecting or attempting to effect transactions in securities. Consequently, activities of finders could cause them to be defined as one or more of these regulated securities personnel, requiring them to be registered federally and with any number of states.

Although the securities laws do not define “finder,” there have been a number of no-action letters where the Securities and Exchange Commission has helped define what finder conduct does not cross the line to require registration, the socalled de-facto “finders’ exemption.” Where a finder only makes an introduction and is not involved in negotiations, does not provide any analyses and does not receive a success fee, the finder will not likely cross the line to require registration as securities personnel. However, many finders will do much more than make introductions and will likely want a success fee. So what’s a company to do?

Company Risks

Companies using unregistered securities personnel run a number of risks that can expose them to significant penalties under federal and state law. Contracts with the investor may be void. The company may be considered an aider or abetter of the unregistered finder. Investors may have the right of rescission, and the company would have to return their investment, often with interest plus costs and attorneys’ fees. Issuers can also face various federal and state cease-and-desist orders and fines and penalties which can reach $25 million and 20 years in prison. On perhaps a more practical level, issuers can suffer reputational damage for having used unregistered finders and may jeopardize their ability to raise capital in the future, including going public, because of having to do a rescission offer or needing to provide disclosure of the risk of having to do so.

How Can Companies Protect Themselves?

Know your finder. In the contract or engagement letter with
the finder, issuers should get a representation that the finder is appropriately registered. Alternatively, the issuer could get a representation that the finder will not engage in any conduct requiring registration. In addition, issuers can structure the engagement to minimize the risks. The contract could involve a flat fee only and provide for only introductions. The finder should not be involved in the negotiations or any analyses of the transaction or the closing. In addition, the finder should not act as a conduit for securities or funds. The finder could also provide indemnification of the issuer for violation of law or breach of representations, warranties or covenants, but in the securities arena, indemnification may be void as a matter of public policy.


While capital raising is the lifeblood of many companies, they should be mindful of the use of finders. With awareness of the issues and the proper structuring of the engagement, companies can obtain their much needed capital and minimize adverse consequences. For more information, please contact Donna Brooks at (860) 251-5917 or

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