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Think It's Found Money? Better Do It Right When Raising Investment Capital

By Adam J. August
January 31, 2008

When a business needs to raise money it may consider hiring a 'finder,' which is normally a consultant who helps the company find investors in the business. The company should proceed with caution in retaining a finder due to the regulated nature of its business, and there are several 'market' terms in a written Finder's Fee Agreement that the company should insist upon.

Generally, a 'finder' or 'placement agent' receives a 'finder's fee' depending upon the amount of capital it introduces to the company. The Securities and Exchange Commission ('SEC') has long regulated this practice and, depending upon a facts and circumstances test (known as the 'Issuer Exemption'), requires finders to be registered as broker-dealers under '15(a)(1) of the Securities Exchange Act of 1934. The factors the SEC considers for a finder to fall under the Issuer Exemption include:

  • Whether the finder is an employee or independent contractor of the company;
  • Will the finder's compensation be linked to the amount of securities sold or is it a fixed compensation;
  • Does the finder devote a substantial portion of his or her time to rendering services for the company that are not related to the sale of securities;
  • Does the finder intend to remain with the company after completion of the offering; and
  • In the past, has the finder participated, or will the finder in the future participate, in other offerings by this or other companies?

The rationale for exempting finders from registration is that the finder is not a broker because he or she is not 'effecting' transactions for others. That is, the finder's activities are limited to identifying potential investors and introducing them to the company. The negotiation of the investment terms, the theory goes, is strictly between the company and the investor.

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