Glenn E. Morrical, Jennifer W. Berlin and Robert M. Loesch
Tucker Ellis LLP
The capital markets are heating up, and as a result we are seeing increased interest in raising private capital for early-stage and private equity transactions. Because the private capital market is so inefficient, the use of ‘finders’ to secure capital is increasing.
In the course of advising clients and reviewing proposed ‘finder’ engagement agreements, we often hear folklore, or possibly wishful thinking, about the laws that apply to using agents to raise capital. This folklore typically takes the form of ‘finders’ (i.e., persons who raise capital for a fee) and issuers (i.e., companies raising money), and assumes that the regulation of securities broker-dealers does not apply where a party seeking debt or equity funds hires a finder to introduce investors to the issuer. Often the documentation describes these activities as ‘consultation’, as opposed to classic broker-dealer activities, but the fundamental relationship is the same: The finder is paid to bring investors (which may include lenders) to the issuer.
As is almost always the case, this folklore is incorrect. Confusion as to the law in these situations is dangerous for all parties to the transaction, including the issuer, the finder, and in certain instances, the investor.