Unregistered Finder; Can Issuer's Counsel Participate in the Deal?

Joseph W. Bartlett, Founder of VC

An issue of The Private Equity Bulletin discusses the question whether an individual or entity which is and only is, a placement agent (a "finder") must register under the '34 Act and apply for membership in the NASD. The issue is thorny, particularly now that the ABA Committee published a Task Force report, available in the current edition of The Business Lawyer, and online, which could easily be construed as the pre-cursor of an SEC proposed regulation requiring so-called "finders" to register in accordance with a regime commonly known as "Broker/Dealer Lite." Pending the resolution of this issue, which is very much in suspense, law firms have to consider the following:


What are the responsibilities of law firm professionals when representing either the investors or the issuer in a transaction which has been agented and midwived by an unregistered finder? Assume a law firm is engaged by an issuer seeking capital; the issuer coincidentally has a well known and well respected finder … which is not however, registered under the '34 Act or an NASD member. Need the law firm turn down the representation? Assuming the answer to that query is 'no,' what type of advice and/or cautions should the firm, under the applicable professional best practices, extend to its client? (Assume, as a variation on that theme, that the law firm is representing the investors … say, a professionally managed private equity fund). Herewith some suggestions for discussion … not meant as pronouncements but as items which recipients of this memorandum are invited to peruse and respond to.

My view which is personal, and does not represent the position of this law firm, is as follows:

When counsel is representing the issuer, the engagement letter should contain a warning and caveat to the following effect (target language to be shaped by the lawyers at the firm sensitive to the requirements of the local version of the Code of Professional Responsibility), viz:

"We understand that Newco Inc. has employed a placement agent, Finder Inc. ("Finder") to assist in the placement referred to in the body of this letter and proposes to compensate Finder on a basis which includes a success fee. Moreover, it is anticipated by Newco that Finder will participate in the negotiating the placement ... amount and terms ... with potential investors.

"You are hereby cautioned that, as we understand it, Finder may be required to register, but currently is not registered, as a broker/dealer under Section 15 of the Securities & Exchange Act of 1934 and to join, but has not joined, the NASD as a member [plus any requirements under State law arguably applicable]. Although there is no controlling precedent of which we are aware, at least some authorities have suggested (and there are, to be sure, opposing views) that the participation of an unregistered broker/dealer in the placement might involve legal responsibilities and consequences imposed on Newco as the issuer of the securities in question by virtue of, e.g., Section 29(b) of the Exchange Act. We are also cognizant of the various proposals to the SEC that this issue be clarified by the promulgation of rules on the subject … but such clarification has not yet been published. In view of the lack of authority on this issue, we express no opinion on the likely outcome of any controversy involving Newco and the provisions of the '33 and '34 Acts, and/or State securities law, including but not limited to a challenge to the status of the transaction as a private offering exempt from registration under Section 5 of the Securities Act of 1933. We call the issue to your attention and will be happy to discuss it further with you."

Is this enough? Will this language adequately clue the client that the law firm may not be in a position to issue an opinion on the exempt status of the offering … which, in turn, may scare off investors?