A finder is an individual or small entity, controlled by both state and federal regulations, who acts as an intermediary to promote the sale of securities; in other words, they help you find money. However, these individuals or small entities are required to be licensed broker-dealers, registered by the federal government and often states. It is acknowledged that many individuals and small businesses act as finders in California even without being licensed and registered with the state. This poses liability for all involved and violators can be subject to administrative, civil and criminal penalties. Additionally, use of a finder can negatively impact current and future fundraising efforts in other ways.
The current landscape can back companies, who need capital and who have had no luck raising capital on their own, into a corner: “Do I break the law and risk its consequences by working with a finder or do I do nothing and try and get by without additional capital?”
The Corporations Committee (State Bar of CA Business Law Section) whose purpose is to examine and then advocate needed changes to the California Corporations Code to promote efficiency, has found that the services finders provide are extremely beneficial in providing assistance to small to mid-sized businesses, which would otherwise be unable to obtain sufficient capital to operate. Unfortunately, it can also be costly for both parties – the finder to become a licensed broker-dealer, and for the individual or business to hire a licensed broker-dealer. This can contribute to one of the many reasons finders do not comply with state regulations. California and federal law agree that a finder’s activity may be lawful or unlawful depending on the degree of involvement or compensation received, yet there is no clear distinction as to what degree constitutes illegal activity, which leaves much to interpretation in the Code for finders or persons acting outside the narrow scope of the definition of a “broker-dealer”. For these reasons, the Committee would like to amend portions of the Corporate Securities Law of 1968 Section 25004(a), which defines a broker-dealer, to:
(1) Provide transparency among issuers, finders and investors which would help to mitigate liability and;
(2) Recognize the benefits finders provide.
This is a very interesting development that could change the fundraising landscape. If enacted, the amendment would help to improve efficiency and effectiveness in practice by establishing requirements based upon the current legal framework for persons acting as finders in connection with securities transactions who fall outside of the definition of a broker-dealer. The Proposal would create a safe harbor, which would exempt from the definition of a broker-dealer persons acting in compliance with the Proposal’s requirements, thereby exempting such persons from the certification and other requirements of Code section 25210 which states it is unlawful for a broker-dealer to conduct business in California without a certificate from the California Department of Corporations. Finally, it would provide a mechanism to furnish individuals and small business entities with capital, offer investor protection, and contribute to a financially stable ecosystem.
Until this proposed amendment is enacted, it remains illegal to work with finders in California. If you are considering using a finder or have any questions about this nuanced subject, please give us a call at 858-964-4697 or shoot us an email at firstname.lastname@example.org. We would love to hear from you. There will be more developments in the future and we will keep you updated.
The proposed text of the amendment can be found here: