On May 17, 2010, the SEC denied a No-Action request from a Virginia law firm to be exempt as a finder from the registration requirements of a broker-dealer. The letter can be read here.
The law firm wanted to act as a finder so that it could help one of its clients find investors in a private placement. The law firm proposed to have a very limited role in the private placement, but did propose to be paid a transaction-based fee tied to successful investments by investors introduced by the law firm. This is where the SEC took issue, stating “[t]he staff believes that the receipt of compensation directly tied to successful investments in [the client's] securites by investors introduced by [the law firm] would give [the law firm] a ‘salesman’s stake’ in the proposed transactions and would create the heightened incentive for [the law firm] to engage in sales efforts. Accordingly, the staff believes that [the law firm's] proposed activities would require broker-dealer registration.”
This is a more restrictive position than that historically taken by the SEC. Historically, the SEC has looked at a variety of factors, including whether the finder was involved in the negotiations, solicited investors, made recommendations to prospective investors, and the frequency of the finder’s involvement in the sale of securities. But in this no-action denial, the SEC focused squarerly on transaction-based compensation.
While there has been a variety of recommendations for the SEC and/or individual states to regulate finders at a lower level than broker-dealers, at this time the SEC is not considering any formal actions to exempt finders.
