Without much fanfare the legislature passed and the governor signed Assembly Bill No. 667 In October 2015. California is now at the forefront of finders laws across the U.S. The question in broad terms is how to or whether to regulate persons who assist businesses in the financing process but who do not fit in protected categories such as representatives of registered broker-dealers, investment bankers, and the like. California has taken the position that if individuals fit within a narrow category, limit the scope of their activities and file the requisite paperwork with the state, then they should be protected from liability for not being licensed. This is a sensible position which must be contrasted to the SEC’s position as described below.
SEC and finders
The SEC takes the view that stands for the proposition that anyone, person or entity, that engages in capital raising involving a security must be a registered broker-dealer or a registered representative of a broker-dealer per Section 15(a) of the Securities Exchange Act. This view is not shared by the courts, much of the legal profession, and most business professionals active in capital raising. This uncertainty, I would argue, impedes capital-raising activity and raises the cost of capital especially for smaller companies.
The bill only exempts natural persons and only with respect to introductions made to accredited investors as that term is defined under federal securities laws.
In order to take advantage of the exemption the finder must file a form with the securities commissioner and pay a filing fee of $300 before engaging in any introductions. In addition, the finder must obtain the informed written consent of each person introduced or referred by the finder.
The bill specifies a variety of prohibited activities that finders must avoid to fit within the exemption. The individual cannot do any of the following:
(1) Provide services to an issuer for a transaction or a series of related transactions for the offer or sale of securities of the issuer that exceeds a securities purchase price of fifteen million dollars ($15,000,000) in the aggregate.
(2) Participate in negotiating any of the terms of the offer or sale of the securities.
(3) Advise any party to the transaction regarding the value of the securities or the advisability of investing in, purchasing, or selling the securities.
(4) Conduct any due diligence on the part of any party to the transaction.
(5) Sell or offer for sale in connection with the issuer transaction any securities of the issuer that are owned, directly or indirectly, by the finder.
(6) Receive, directly or indirectly, possession or custody of any funds in connection with the issuer transaction.
(7) Knowingly receive compensation in connection with any offer or sale of securities unless the sale is qualified under this division or unless the security or the transaction is exempt or not otherwise subject to qualification.
(8) Make any disclosure to a potential purchaser other than the following:
(A) The name, address, and contact information of the issuer.
(B) The name, type, price, and aggregate amount of any securities being offered in the issuer transaction.
(C) The issuer’s industry, location, and years in business.
The passage of this law will provide persons operating in California with a safe-harbor, but will not do anything to protect them in other states. Nevertheless, a side benefit of this law is that companies that raise money in California using finders that qualify for protection will not have to worry about refunding investors’ monies due to their use of an unregistered finder.