Companies seeking capital are frequently approached by finders who offer to locate investors in exchange for a percentage of funds raised. Most finders are not registered as broker-dealers with the Securities and Exchange Commission (the “SEC”). The possibility of receiving capital even through the efforts of a finder creates a tempting opportunity for issuers and a lucrative proposition for the finder. While it may seem harmless enough, the SEC does not think so and in fact, the SEC frequently brings cases against unregistered finders and those who aid and abet them.
On March 8, 2013, the SEC’S Division of Enforcement charged against Donald W. Stephens, who acted as a consultant for investment fund, Ranieri Partners LLC (“Ranieri”). According to the SEC’s Division of Enforcement, Stephens actively solicited investors on behalf of Ranieri in exchange for a fee of 1% of all funds raised from investors which resulted in fees of approximately $2,400,000.
Stephens was not registered as a broker or dealer or associated with a registered broker or dealer as required by SEC rules. Stephens had been previously barred from association with any investment adviser for a period of two years and never reapplied for permission to become associated with an investment adviser.
According to the SEC’s charges, Stephens engaged in activities which require registration as a broker. These activities include:
• Delivering offering materials to investors including private placement memorandums, subscription agreements, and due diligence materials;
• Attending meetings and participating in telephone calls with potential investors;
• Advising at least one investor to consider adjusting his portfolio so that he could invest in Ranieri; and
• Providing potential investors with his own analysis of Ranieri’s strategy and performance record.
Stephens consented to a cease and desist order for acting as an unregistered broker-dealer and he was barred from associating with any broker-dealer or investment adviser. Stephens was also order to disgorge the fees he received.
In a related matter, the SEC charged Ranieri and its principal Donald W. Phillips who was responsible for raising capital for its private funds. According to the SEC, Phillips was aware of Stephens’ prior disciplinary history with the SEC when Stephens was engaged to locate investors. According to the SEC, Ranieri and Phillips provided Stephens with investor materials and information and failed to take adequate steps to prevent Stephens from having substantial contacts with Ranieri’s potential investors.
The SEC found that Ranieri failed to adequately oversee Stephens’ activities and that Phillips knowingly and willingly provided him with substantial assistance while at the same time ignoring red flags that revealed Stephens was actively soliciting investors. As a result, Ranieri was found to have caused and Phillips was found to have aided and abetted Stephens’ failure to register as a broker-dealer with the SEC. Phillips agreed to a cease-and-desist order and a $375,000 fine against Ranieri and $75,000 fine against Phillips. Phillips also was suspended from holding a supervisory position in the securities industry for nine months.
This action demonstrates that the SEC may be focusing greater efforts on bringing cases against finders for unregistered broker-dealer activity, and demonstrates a willingness of the SEC to bring actions not only against unregistered finders, but also issuers and funds who who engage them, particularly if there is knowledge of the unregistered broker dealer activity. The use of a finder can lead to potential liability for the issuer as well as a finder. The potential harm to the companies that use unregistered finders include SEC enforcement actions as well as investor rescission rights. If used, the finder should do no more than make introductions of investors to issuers, and should only be compensated by a flat fee which is not based upon the sale of securities. An agreement between the issuer and the finder should be drafted by a qualified securities attorney familiar with the activities requiring broker dealer registration. Hamilton & Associates has represented market participants in securities law matters including compliance with the rules and regulations applicable to finders activities for more than 10 years.
For further information about this securities law blog post, please contact Brenda Hamilton, Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton Florida, (561) 416-8956, by email at firstname.lastname@example.org or visit www.securitieslawyer101.com. This securities law blog post is provided as a general informational service to clients and friends of Hamilton & Associates Law Group and should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. For more information about going public and the rules and regulations affecting the use of Rule 144, Form 8K, crowdfunding, FINRA Rule 6490, Rule 506 private placement offerings and memorandums, Regulation A, Rule 504 offerings, SEC reporting requirements, SEC registration statements on Form S-1 , IPO’s, OTC Pink Sheet listings, Form 10 OTCBB and OTC Markets disclosure requirements, DTC Chills, Global Locks, reverse mergers, public shells, direct public offerings and direct public offerings please contact Hamilton and Associates at (561) 416-8956 or email@example.com. Please note that the prior results discussed herein do not guarantee similar outcomes.
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