When finders are losers: Licensing of "finders" under the securities laws.

• Author: Spendlove, Gretta
• Position: Of Counsel - Brief Article

During the early 1990s, Paul Anka, the pop singer, was hired by the Ottawa Senators Hockey Club to find investors, Anka's lawyers worried about securities laws restrictions, so they asked the U.S. Securities and Exchange Commission for advice, in the form of a no-action letter, as to what fundraising Anka could do without being licensed as a securities broker. The answer -- very little. Anka could provide company officials with names and phone numbers of Anka's moneyed friends, but he couldn't negotiate the sale, prepare sale documents or make disclosures about the company to investors.

The Problem--Unlicensed Finders

"One of the hottest issues in securities right now is the use of finders and placement agents, and the extent to which they need to be registered under state and federal securities law," says Salt Lake City securities lawyer Todd Leishman. The actions that unlicensed finders can take are limited, both by the securities laws themselves, and by the interpretation put on those laws by the SEC's Paul Anka ruling. "The company may want to say to a finder, 'We don't care if you're licensed or not,"' says Leishman. "But if a securities issue is sold through an unlicensed broker dealer, there could be liability to the company issuing the stock."

"Finding investors has become a cottage industry in Utah," says Gary Winger, another Utah securities lawyer. "There are lots of people out looking for money to help high-tech companies and other start-ups get off the ground and get going. The problem is that some securities exemptions are based on no commissions being paid to unlicensed brokers. If unlicensed brokers are used, the company may lose the exemption for its offering."

What is the effect of a company losing the exemption for its offering? The investors may sue the company for failure to comply with the securities laws, or they may seek rescission of their contracts, forcing the company to pay them back all money invested, together with interest and attorneys' fees. The word 'securities' is broadly defined, under the securities laws, to include not just stock in corporations, but most interests in limited partnerships and limited liability companies.

The State's Position

What can be done about unlicensed finders...