For over twenty years I have been representing various early-stage startups in Silicon Valley. Startups require significant capital, and banks are hesitant to lend funds to small businesses without collateral or personal guarantees. Therefore, most startups look for early-stage high-risk capital to fund their business, and this capital comes from venture capital firms and wealthy investors. Raising early-stage capital is a tough and time-consuming process, even for veteran entrepreneurs.
Often, after struggling for months with limited success (which is common for startups), my clients will come to me with what they believe is a solution. A financial consultant has come to them and made big promises about their vast network of wealthy connections eager to make an investment in the company. For an upfront “due diligence” fee, they will act as a finder and make introductions by potential investors to the company and take a percentage commission on each successful investment into the company.
What many people don’t know is that aside from a few limited exceptions, taking such commissions and getting involved in the offer and sale of securities, even as mere finder or intermediary, is a highly regulated area with strict federal and state standards that must be met to engage in this type of activity. Many types of activities, such as receiving transaction-based compensation involving securities, negotiating terms of an investment, recommending a company or the purchase of its securities, conducting investment meetings or presentations, providing valuations or due diligence reports for investment, and other activities that facilitate securities transactions may fall within “broker-dealer” activities, and with few exceptions, require registration under Financial Industry Regulatory Authority (FINRA) and various state securities agencies. Unfortunately, in my experience most of the time when clients come to me with this type of finder engagement, unless the financial consultant is registered with FINRA, these financial consultants are acting as unlicensed “finders” and therefore violating state and federal laws that could put my client in legal peril.
The Securities and Exchange Commission and the California Department of Business Oversight have enacted guidelines and rules that provide exemptions from the broker-dealer registration licensing requirement for individuals acting as “finders” in securities transactions. The legal framework is quite complicated, however, even for legal counsel, and it is therefore imperative that companies engage experienced securities law attorneys when considering engaging such a “finder” in order to ensure compliance with the law. Failure to comply with applicable law can result in the violation of various federal and state laws by both the finder and the company, including possible criminal and civil penalties, rescission rights for investors, accounting problems, and many other problems that could prevent the company from ever raising capital in the future. Before engaging any such finders, consult an attorney experienced in securities law to prevent serious missteps in raising funds to build your business.
