By: Ted Sutton, Esq. There are some promoters out there who claim that they have a trust strategy whereby the trust avoids paying income taxes. But recent IRS rulings have started to crack down on this practice. The most recent ruling came from Chief Counsel...
By: Ted Sutton, Esq. A security refers to an ownership interest in a business or a financial instrument. These ownership interests can be in a private LLC, or corporation, or in a publicly traded stock or bond. There are two choices for holding ownership interests in...
By: Ted Sutton, Esq. Marissa was an aspiring barista who lived in New York City. After she graduated high school, she started her own coffee shop in Brooklyn. She properly formed a New York LLC. However, she forgot to report her beneficial ownership information to...
Finder’s Fees Now Allowed for Securities Offerings in Calif.
California Does Something Right!
Since I am so critical of California’s anti-business policies and bureaucracy, it is only fair that I notice and spread the word when they have gotten something exactly right.
So a tip of the hat to California’s legislature for passing Assembly Bill No. 667 and to Governor Jerry Brown for signing it into law. Raising money for entrepreneurs and real estate investors just got a whole lot easier in California.
Under most state laws you can’t pay a commission to someone for finding you an investor unless they are a licensed broker dealer. At the same time, most broker dealers (think Merrill Lynch or Charles Schwab) don’t want their broker’s putting investors into smaller deals. As a licensee you have all these fiduciary duties and obligations to comply with. There is too much risk investors will lose their money and blame the broker. The Charles Schwab’s of the world want no part of such aggravations. So you have this no man’s land where brokers have to be licensed to sell the deal, and because they are licensed they won’t sell the deal.
Enter California’s common sense legislation.
Within the securities world ecosphere there are people known as ‘finders’. They find money or deals and expect to be paid. If they raise $1,000,000 for your new company they want 10% (or $100,000) of what they raised. The problem is that, as mentioned, only licensed broker dealers can receive such commissions. Sometimes, with a wink and a nod, a finder will pretend to be an officer of the issuer (the company raising money) and will receive a ‘salary’ instead of a commission or they will provide ‘marketing services’ and receive an amount of money that is suspiciously close to the 10% commission, they would have received as a broker dealer.
Reason 1. “Finder” has been redefined
California’s law eliminated such machinations and gyrations. Section 25206.1 has been added to the California Corporations Code. It defines a “finder” as a natural person (not a company) who introduces accredited investors to an issuer who is seeking to raise up to $15 million in capital. An accredited investor is someone with over $1 million in net worth (exclusive of their personal residence) or one who makes over $200,000 a year (or $300,000 if they are married). So while the finder can’t introduce mom and pop investors, those aren’t the people the issuer wants to meet anyway. Even with the advent of equity crowdfunding, most offerings are geared towards accredited investors only.
Reason 2. The Finder’s role is clearly defined
The finder is limited in what they can do besides introducing the parties (which, if you are a finder, means less work for you). The finder can’t negotiate any of the terms, advise on the suitability of the offering, do any due diligence or handle any monies. In fact, the only disclosure a finder can make to a potential purchaser is the following:
- The name, address and contact information of the issuer.
- The name, type, price and aggregate amount of any securities being offered in the issuer transaction.
- The issuer’s industry, location and years in business.
If that’s all you have to do then sign me up!
Reason 3. Get in the Game by Registering with the State
Actually, that is the first step: Signing up. Before engaging in any activities the finder must file a form with the California Corporations Commissioner. They want your name and address and a $300 fee.
Importantly, for each introduction the finder must obtain a written agreement signed by the finder, the issuer, and the person introduced or referred, disclosing the following:
- The type and amount of compensation that has been or will be paid to the finder in connection with the introduction or referral and the conditions for payment of the compensation.
- That the finder is not providing advice to the issuer or any person introduced or referred by the finder to an issuer as to the value of the securities or as to the advisability of investing in, purchasing or selling the securities.
- Whether the finder is also an owner, directly or indirectly, of the securities being offered or sold.
- Any actual and potential conflict of interest in connection with the finder’s activities related to the issuer transaction.
- That the parties to the agreement shall have the right to pursue any available remedies at law or otherwise for any breach of the agreement.
- That person being introduced is an accredited investor and that they knowingly consent to the compensation being paid to the finder.
The finder must keep all these notices for a period of five years.
Reason 4. Registration Protects the Issuer as Well
The issuer should make certain the finder is signed up with the state and exempt from needing a broker dealer license. If the person really isn’t a finder, the investor can sue the issuer for a rescission. This means the investor can rescind their investment and get back all of the money they put in, plus interest, from the issuer. The finder may be nowhere to be found, putting the issuer at risk not only for the money they received but the commission they paid out, too. Issuers must be cautious.
But aside from such concerns, the freedom to be able to pay a finders’ fee to a finder is a positive development. More money will be raised and more jobs will be created. California actually did something right.
For more information on ways to raise money for your business consider reading my new book, co-authored with Gerri Detweiler, Finance Your Own Business.
Learn How to Get on the Fast Track to Financing
Our book Finance Your Own Business: Get On The Financing Fast Track details the power of business credit, how to get an SBA loan, the secrets of micro lenders, the benefits of crowdfunding and more.
About the Authors
Garrett Sutton, Esq., author of Start Your own Corporation, Run Your Own Corporation, Loopholes of Real Estate, The ABC’s of Getting Out of Debt, Writing Winning Business Plans and Buying and Selling a Business in the Rich Dad Advisors series, is an attorney with over twenty-five years experience in assisting individuals and businesses to determine their appropriate corporate structure, limit their liability, protect their assets and advance their financial, personal and credit success goals.
Gerri Detweiler is the author of four books, including the Ultimate Credit Handbook (named one of the top five personal finance books of the year when it was released), and a media favorite quoted in publications like USA Today, The Wall Street Journal and featured on The Today Show and CNN. A credit educator since 1987, she’s served on credit reporting agency Experian’s Consumer Advisory Council twice.