Beware Finder’s Fees & Unlicensed Business BrokersBy James Blake on
If you’re an entrepreneur or startup business seeking investor financing, the sense of urgency and desire to secure angel investor funding can sometimes lead to mistakes with serious consequences. Paying a “finder’s fee” or other type of benefit to an unlicensed third party “engaged in the business of effecting transactions in securities” is a common and tempting mistake. A Texas securities law attorney can help you avoid securities and investment law mistakes, preventing your business startup from landing in hot water.
“Outsmarting” Securities Law
Many smart entrepreneurs and business startups mistakenly believe they can “outsmart” securities and investment law with business contracts that attempt to circumvent the “letter of the law.” This approach is misguided because courts in the U.S. look to the facts of the case, instead of accepting the imaginary structure that you may construct on paper. The definition of “engaged in the business of effecting transactions in securities” is very broad because it isn’t defined by statute or administrative code. Instead the definition is broadly interpreted through a host of judicial and administrative opinions, and expansively includes but is not limited to:
● Intermediary services, including solicitation, valuation advice, etc.
● Negotiating, structuring, or drafting the purchase or sale of business stock or securities;
● Activities compensated contingent or relative to the purchase or sale of stock or securities
Consequence of Paying Finder Fees to Unlicensed Broker
Depending on your company’s location, the state or country of the third party finder, and the state or country of your investors, a myriad of state, federal, and international regulations may apply to your transaction. At a minimum, an investor may file a lawsuit demanding a full return of his investment and the amount you spent on the finder’s fee.
Alternatively, imagine that you have the opportunity to implement your business exit strategy, and you enter into negotiations and due diligence to sell your company, to merge with another company, or to launch an initial public offering (IPO). Due diligence into your company’s prior financing transactions with an unlicensed broker could stop your deal cold in its tracks.
Licensed Broker Disclosures to Non-Accredited Investors
Even transactions with licensed brokers require caution. Licensed brokers cannot effect a securities transaction to non-accredited investors unless:
1) there are reasonable grounds to believe the sale is suitable for the investor,
2) the investor has been provided with all proper disclosures, and
3) the investor had enough knowledge and experience to evaluate the investment and risks.
If you want your angel financing or venture capital to be the beginning of your business success story, it’s imperative to adherence to all state, federal, and applicable international regulations. Before you put the success of your company in jeopardy, consult with a securities lawyer to ensure that your business funding is optimized to achieve your company’s growth and value-realization goals.
Our firm regularly consults entrepreneurs, founders, startups, and other business owners, providing securities law attorney services and investment structuring advice. Call today for a free phone consultation.
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