Lately I have gotten a number of questions about raising capital for small companies. It usually starts with a question about someone who has good connections and believes that she can raise money for the company but wants to receive some type of compensation.

They want to know if this person can receive payment and in what form. The answer to this question is very fact specific, so this is not legal advice. But this post will help you to formulate the question you are going to ask when you seek legal advice.

A person or entity that requires registration with the SEC and FINRA, as a broker is defined as:

any person engaged in the business of effecting transactions in securities for the account of others.

Admittedly this is not particularly helpful. But in its publication on the registration of broker-dealers the SEC adds the following:

  • Finding investors or customers for, making referrals to, or splitting commissions with registered broker-dealers, investment companies (or mutual funds, including hedge funds) or other securities intermediaries;
  • Finding investment banking clients for registered broker-dealers;
  • Finding investors for “issuers” (entities issuing securities), even in a “consultant” capacity;
  • Engaging in, or finding investors for, venture capital or “angel” financings, including private placements;
  • Finding buyers and sellers of businesses (i.e., activities relating to mergers and acquisitions where securities are involved);

The list is much longer but for purposes of this post we will focus on finders.

You will notice that there is more mention of money or compensation. The actual key is the phrase “engaged in the business of”. How do you do that? Well you could start a company that conducts the activities listed above. The SEC says if you do any one of the items listed below you need to register as a broker:

  • Do you participate in important parts of a securities transaction, including solicitation, negotiation, or execution of the transaction?
  • Does your compensation for participation in the transaction depend upon, or is it related to, the outcome or size of the transaction or deal? Do you receive trailing commissions, such as 12b-1 fees? Do you receive any other transaction-related compensation?
  • Are you otherwise engaged in the business of effecting or facilitating securities transactions?
  • Do you handle the securities or funds of others in connection with securities transactions?

There are a few more issues to consider. For instance are you effecting securities transactions? For the most part any type of interest in an entity is a security. Also you could refer someone and get paid for a transaction that is not clearly defined at the time you make the introduction. It is possible that the initial contact is for a loan and then turns into a securities transaction when you decide to enter into a convertible note transaction.

The final point is that when someone tells you they can raise capital for you and want to receive payment you need to ask some questions and seek legal advice on whether this individual needs to have some type of registration.


Copyright © Sharon M. Davison 2018


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