CAPITAL FUND LAW BLOG
John S. Lore, Esq. | Capital Fund Law Group, PC
After the initial seed raise, many issuers find it difficult to locate sufficient accredited investors to participate in the offering and turn to intermediaries. When using intermediaries, a company must (unless conducting a Rule 506(c) offering) ensure that the intermediaries follow the rules requiring substantive pre-existing relationships with any prospective investors and avoid general advertising and solicitation. Intermediary violations of securities rules and regulations can subject the issuer to the same liabilities as if the issuer had committed the violations.
Typically, the starting point for finding investors is the company’s directors, managers, partners, officers, or employees. These individuals can raise investments from investors with whom they have existing relationships.
However, the company should be aware of the SEC’s disqualification of certain individuals, including those currently under order of suspension or expulsion from the SEC or FINRA, or other specified self-regulating agency. Further, the company should be aware of the SEC’s bad actor disqualification for individuals that have been expelled or suspended from membership of any self-regulatory organization, or have been convicted of securities violations. Should the company have any concerns that an associated person might fail one or more of the above provisions, it is strongly urged that you speak with qualified legal counsel before proceeding.
broker-dealer Placement Agents
Only broker-dealers registered with FINRA can receive transaction-based compensation as an intermediary in a securities offering. Broker-dealers tend to be very selective in accepting engagements, as broker-dealers and their insurers carry significant liability in connection with the offering. Before a broker-dealer will agree to participate as a placement agent, it will perform a due diligence review of the company to establish that the private placement meets the risk profile of the broker-dealer and its insurer.
The use of individuals not registered as broker-dealers as intermediaries (so called “finders”) is allowed only in an extremely narrow set of circumstances. Generally, giving transaction-based compensation to a finder for selling securities is illegal, although it remains a common practice. The SEC has recognized the widespread use of finders and as a result has increased its enforcement against unregistered individuals and imposed liability for engaging in activities explicitly reserved for registered broker-dealers. The SEC has also intensified its enforcement actions against issuers and their officers or directors who employ finders in violation of SEC regulations. Because engaging finders can subject the issuer and even its management to significant unneeded liability, we strongly recommend that finders not be used. If you have specific questions about the use of finders, please call our office to discuss your specific circumstances.
Capital Fund Law Group has authored numerous investment fund publications, including instructive eBooks, white papers, blog posts and sample offering document excerpts with illustrative footnotes. These complementary downloads are dedicated to explaining the legal fundamentals of securities offerings and fund formation.
ABOUT CAPITAL FUND LAW GROUP
Capital Fund Law Group is a boutique investment law firm focused on advising private placement issuers and fund managers on all aspects of conducting an offering. We provide predictable flat-fee services for most of our engagements. Our attorneys have extensive experience preparing debt and equity private placement offerings for companies in all major industry sectors throughout the United States. We also advise hedge funds, real estate funds and private equity funds in various structures and strategies.
PREPARING AN OFFERING