The Finder's Fee

July 27, 2010 W. R. Eilers No Comments

So lately I have been a bit slow on the blogging front.  Sadly, this leads to long winded think sessions that should eventually get to publish but never actually do.  The “draft” icon is bearing down on me lately.  So on that note, here is something that was meant to be written weeks ago.  If you have ever been involved in introducing two parties with similar interests (mutually beneficial business interests that is; not a passion for betting on jai alai) then you are more than likely familiar with the the “finder’s fee.”  That little piece that says “hey, thanks for knowing somebody.”  Generally, finder’s fees are common in business deals.  You know a guy, Bob, who sells wicker and your cousin Andy manufactures beautiful (so you tell him) wicker furniture.  You get the 2 together and let them know that you want a couple dollars for the trouble of having them buy you drinks and introduce them.  It happens all the time.  Unfortunately, all the time means all the time, even when it is pretty clear that a finder’s fee should land someone with a hefty fine at the very least.

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In investments, particularly anything under the scrutiny of the SEC, a finder’s fee is a dangerous way to pad your friends pocket.  The problem is, your clients probably aren’t so apprehensive.  In fact, they are probably insistent that you “through in a 5% finder’s fee.”  Coming out of the scams of pump and dumps in the 80s and 90s, the SEC made a decision to curb the hand-your-buddy-a-dollar-for-bringing-chumps-to-the-table benefit that so many enjoyed.  The thing is, the SEC doesn’t outright bar Finder’s Fees, it simply puts very strict limits on what constitutes being a finder.  Essentially, the finder is limited to introduction, as in “Bob meet Tom, Tom meet Bob.”  (For more check out what is none as the Anka No Action Letter that sets the parameters.)  Honestly much conversation beyond that was a tactical nightmare for an attorney.   However, that never dissuades the client from continued insistence.  

The issue with the finder’s fee as a violation of the SEC is that it becomes a weapon to be used by a investor soured by their less than epic return on investment.  Since this is a subjective determination (at least to file suit), you can only image the option to get your five dollar back because the PowerBall didn’t hit.  The thing is, if the finder is determined to be a an unregistered broker, the issuer is on the hook for the amount of the investment (including the fee paid out) and the attorney is next in line to take the heat under some form of malpractice claim at the very least.  If you’ve dealt with an investor (or perhaps been the investor) then you know that it doesn’t take much to ruffle feathers with other people’s money.  If you have chosen to walk the thin line of using a finder’s fee, the matter is one of fact, and thus up for argument.  This is not the kind of certainty that makes a transactional attorney very comfortable.  The point is to avoid litigation, not plan for a best case consequence of a poor decision.  If you have to go the route of a finder’s fee (for whatever reason), usually you would have to build a unique transaction whereby you try to limit liabilities.  For example, I once created a certification letter from the investor, acknowledging that the finder only acted in his/her capacity as a finder.  No fees would be paid without a signed certification from the investor.  The attempt, of course, is to be build evidence to your benefit from the beginning.  Another tactic would be to write a letter to the SEC in hopes of getting a favorable no action letter.

This was the tact taken by Brumberg, Mackey, Wall P.L.C. (BMW) out of DC.  The downside, at least from BMW’s perspective, was a no action letter that was less than favorable to the status of finders.  In fact, the SEC stated that despite what BMW characterized and proclaimed as their activity, they were inherently to close to the deal to be deemed a finder on action alone.  You can find the letters here. I say “downside” because to me, this finally gives skeptical attorneys the force of an extremely narrow gap to dissuade insistent clients.  After the BMW letter, there is no real clarity as to whether anyone could be determined a non-broker finder.  The water is so muddy, at this point, I can say with certain confidence, no there will be no finder’s fees available for non-registered persons.  You want a finder’s fee, go get your license and register yourself.   

Although I expect a rule to be amended in the near future to clear up the issue, for now, I find solace in telling my clients to avoid finder’s fees at all costs.  If you choose to take the path through the narrow gap, do so at your own peril.

broker-dealers, finder's fees, no action letters, Private Placement, raising money, SEC

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