Finder’s Fees to Unregistered Individuals for Securities Offerings Soon Legal in California But Conflicts with SEC Policy ElsewhereOn January 1, 2016, a new California law that legalizes the payment of finder’s fees to unregistered individuals for securities offerings will go into effect, creating a fundamental change in California securities law as well as a conflict with Securities and Exchange Commission (“SEC”) policy that considers such payments to be a violation of Section 15(a) of the Securities Exchange Act of 1934.

The new law adds new Section 25206.1 to the California Corporations Code, which requires issuers of securities to meet the following conditions in order to provide finder’s fees to unregistered persons for the sale of securities:

  • The finder must be a natural person, not an entity.
  • The transaction must be a sale of securities of the issuer in an issuer transaction in California.
  • The transaction or series of transactions cannot exceed $15 million in the aggregate.
  • The finder is prohibited from:
    • participating in negotiations regarding the terms of the transaction
    • advising any party on the value of the securities and whether or not to invest
    • conducting any due diligence for any party to the transaction
    • selling any securities the finder owns, either directly or indirectly
    • being in possession of any of the funds involved in the transaction
    • participating in the transaction unless the finder is qualified by permit or is exempt from qualification under California law
    • disclosing to a buyer anything other than the contact information for the issuer; the name, type, price and aggregate amount of the securities offered; and the issuer’s industry, location and number of years in business.
  • Before receiving any finder’s fees, the finder must file a statement of information with his or her name and address with the California Bureau of Business Oversight and pay the $300 filing fee. Every year, the finder must file annual renewal statements and pay the $275 renewal fee.
  • The finder must procure a written agreement signed by the issuer, the finder and the party introduced by the finder that discloses:
    • type and amount of compensation being paid to the finder
    • that the finder is not providing advice to any party to the transaction as to the value of the securities or the prudence of buying or selling them
    • whether the finder owns any of the securities being sold
    • whether any conflict of interest exists for the finder
    • the right of the parties to pursue any available remedies for breach of the agreement
    • representation by the investor that he or she is an “accredited investor” as defined by SEC Regulation D and agrees to the payment of the finders fee
  • The finder is required to keep copies of the notice, written agreement and all records relating to the transaction for five years.

While the new California law will permit the payment of finder’s fees for transactions involving California issuers, sellers and buyers of securities in California, any transaction conducted outside the state will still be subject to federal law. Since the SEC’s current policy prohibits the payment of finder’s fees for securities transactions, violating this policy could result in penalties and other disciplinary actions.

The attorneys at Glass & Goldberg in California provide high quality, cost-effective legal services and advice for clients in all aspects of commercial compliance, business litigation and transactional law. Call us at (818) 888-2220, send an email inquiry to info@glassgoldberg.com or visit us online at glassgoldberg.com to learn more about the firm and to sign up for future newsletters.

Font Resize
Call Now
Directions