Based on input from the State Bar of the California, a bill (AB 667) creating an exemption for finders within California is working its ways through the halls of Sacramento. This is a promising development in an area full of uncertainty. 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 would only exempt 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 activities list broadly speaking mirrors the SEC’s list of risk factors from no-action letters and speeches.
Hopefully the bill will make it to the governor’s desk for signature. If California acts and there are no public hiccups then other states may consider passing their own legislation to address this unfortunate problem.