Ask Securities Lawyer 101 l Financial Intermediaries


Securities Lawyer 101 Blog

It is not unusual for a private or public company to be approached by financial intermediary (“Intermediary”) that offers to locate investors in exchange for a fee.  Most Intermediaries are not registered as broker-dealers with the Securities and Exchange Commission (the “SEC”).

While many Intermediaries are aware of the factors that will determine whether their services will be deemed unregistered broker dealer activity, few are aware of the obligation to disclose their specific compensation to investors.  While it may seem harmless enough to match buyers and sellers, the Justice Department has pursued numerous criminal actions against Intermediaries for paying or receiving fees in capital raising transactions without disclosure to the investor. This blog post addresses common questions we receive about Financial Intermediaries.

Q. What types of activities involve Finders and/ or Intermediaries?

A. Intermediaries and Intermediaries may become involved in various securities transactions such as private placements and public offerings.  Finders and Intermediaries may also be involved in reverse merger transactions.   An Intermediary is not a broker and unlike a broker, an Intermediary or Finder does not regularly engage in securities transactions.

Q. Can I still be an Intermediary or Finder if I participate in negotiations?

A.  A true Intermediary or Finder does not participate in the promotion, negotiation or sale of securities.

Q. What are the broker-dealer registration provisions?

A. Section 15(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) generally requires any person who effects securities transactions to register with the SEC as a broker-dealer.

Q. How can a Finder be compensated?

A. Compensation of Intermediaries based upon the success or completion of the sale or the amount of securities sold is likely to be viewed as unregistered broker-dealer activity.  Similarly, any type of compensation,that is a percentage of the securities sold is likely to be viewed as unregistered broker-dealer activity.  If used, the Intermediary does 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 define the duties and compensation of the Intermediary.

Q. Who has liability if I am deemed to be an unregistered broker instead of a Finder?

A. The temptation of using an Intermediary can lead to potential liability for the Intermediary as well as the Intermediary.  Failure of a Intermediary to be properly registered as a broker-dealer may subject that person to potential liability, including criminal penalties, fines, suspension, and disbarment.

Q. What is the harm to the issuer if I am deemed to be a broker-dealer instead of an Intermediary?

A. The potential harm to the companies that use an unregistered Intermediaries includes investor rescission rights.  Investors will have a rescission right, meaning that they could demand repayment of their entire investment without set-off or deduction.  Companies could also be subject to sanctions and penalties from federal securities regulators as aiding and abetting the unregistered broker-dealer including fines, prohibition on future securities offerings, and criminal actions.

Q. What activities could cause an Intermediary to be deemed an unregistered broker-dealer

A. In order to avoid being deemed an unregistered broker-dealer, Intermediaries should not engage in the activities below.

♦ Intermediaries should not advise investors as to the merits of an investment or  transaction and Intermediaries should not provide detailed information about an investment to investors.

♦ Intermediaries should not participate in the drafting of subscription documents or offering materials.

♦ Intermediaries should not recommend the investment or the transaction.

♦ Intermediaries should not engage in negotiations.

♦ The Intermediary should not receive transaction based compensation such as a percentage of the amount invested; and

♦ The Intermediary should not have previously been involved or, be involved on a regular basis now in the offer or sale of securities.

Q. If I am a Finder or Intermediary do I have to disclose my compensation to the investor or parties I introduce to a transaction?

A. Yes.  In order to comply with the antifraud provisions of the securities laws, the issuer and finder must disclose to investors all compensation paid to the Intermediary or Finder.  Additionally, the Justice Department has pursued numerous cases involving undisclosed fees paid to intermediaries.  These types of undisclosed fees have been the basis for numerous crimiinal actions involving kickbacks in connection with intermediaries raising capital for public and private companies.

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 [email protected] or visit  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.  Please note that the prior results discussed herein do not guarantee similar outcomes.

Hamilton & Associates | Securities Lawyers
Brenda Hamilton, Securities Attorney
101 Plaza Real South, Suite 202 North
Boca Raton, Florida 33432
Telephone: (561) 416-8956
Facsimile: (561) 416-2855