White Collar

Unregistered Finders in Microcap Private Placements

By: Lucosky Brookman
Unregistered Finders in Microcap Private Placements

Hiring unregistered finders to solicit investors or facilitate private placement transactions carries major legal risks for microcap companies needing to raise capital. Avoiding violations requires properly vetting registration status before engaging finders.

Prevalent Use of Third Party Finders to Raise Private Capital

Many microcap companies turn to unaffiliated third party finders to help locate, introduce and solicit accredited or institutional investors for private offerings of stock, convertible notes or other securities. These finders leverage their networks and connections to identify potential investors in return for a percentage of funds ultimately raised or other transaction-based compensation.

Potential Unregistered Broker-Dealer Violations Posed by Finders

However, soliciting investment transactions while receiving commissions or other results-based compensation may legally require broker-dealer registration under Section 15(a) of the Securities Exchange Act. Allowing unregistered individuals to facilitate private placements as paid finders while actually acting as commissioned brokers constitutes federal securities law violations exposing all involved parties to liability.

Some key factors suggesting problematic unregistered broker-dealer activity by a finder include:

  • - Receiving transaction-based compensation like a percentage of funds raised rather than flat consulting fees
  • - Directly soliciting and negotiating with investors rather than just making introductions
  • - Handling investor funds or securities as part of the capital raising process
  • - Providing advice on the merits or risks of the proposed investment transaction

Significant SEC Enforcement Risks of Using Unregistered Finders

Utilizing unregistered brokers poses major securities enforcement risks for the microcap company, its management, directors, and the finders themselves. Unlawful activity may lead to:

  • - Disgorgement orders compelling return of all commissions and transaction fees paid
  • - Substantial civil penalties based on amounts raised
  • - Investor rescission rights unwinding participation in the private offering
  • - Individual bar orders prohibiting securities industry participation
  • - Potential criminal charges for egregious or intentional violations

Mitigating Exposure by Properly Vetting Broker-Dealer Registration Status

Preventing violations requires properly vetting whether finders are registered broker-dealers or may qualify for a valid exemption before engaging them to solicit microcap investments. Experienced securities counsel can efficiently guide compliance by evaluating factors bearing on permissible finder activities versus unregistered broker violations.

Acting quickly to cure any deficiencies will mitigate exposure before problematic transactions occur. We can help clients avoid significant penalties and liability in this area if issues arise. Please contact Lucosky Brookman to discuss vetting your company’s finders.