Response to SEC's Hallmark Capital no-action letter

Samuel M. Shafner, Burns & Levinson LLP

"I commend Sean O'Malley for bringing the SEC's June 11th Hallmark Capital no-action letter denial to the public's attention. However, I read his final paragraph to imply that transaction-based compensation and the activity of identifying and introducing financiers was the primary reason for the SEC's denial of Hallmark's bid for "finder" status in this case. If indeed he meant this, then I must respectfully disagree.

It seems illogical to cite transaction-based compensation and the act of making introductions as the reasons why finder status was denied, since both of those are exactly what finders are supposed to do. In fact, the SEC in its response specifically directed Hallmark Capital's attention to its recent (November 8, 2006) letter granting no-action status to Country Business, Inc., even though Country Business explicitly and unabashedly accepted transaction-based (and even consideration-based) compensation, and certainly did make introductions. By contrast, it is when an intermediary attempts to cast itself as a "financing consultant," and purports to distinguish between providing various financing services and acting as a broker-dealer, that the presence of transaction-based compensation is cited as the primary factor refuting such a contention. But a finder is someone who does not pretend to be in it for anything other than a commission.

Rather, I think Mr. O'Malley's final sentence of his article was closer to the mark, in noting that a finder must "play a very limited role" in the parties' post-introduction proceedings. The main reason why Hallmark could not be a finder, I believe, is that it emphatically participated in such post-introduction activities. In fact, in its letter to the SEC, Hallmark "led by its chin" in citing their "hundreds of hours of work over many months before a transaction is completed." This is precisely what a finder is not supposed to do! And to compound the problem, they apparently "held out" publicly as assisting companies in raising capital generally, which implies a deeper involvement than mere introduction.

I suspect that the SEC may be trying to limit "finders" to those who make casual introductions for a contingent fee, but who then step aside and make no professional pretensions to special expertise in the field. Such people are opportunistic matchmakers, but not "professional" midwives to a financing process -- and to the SEC, therein seems to lie the critical difference.

It is the role of assisting the financing process in significant ways that, I think, appears to the SEC to be closer to the 1934 Act's definition of "engaging in the business" of effecting securities transactions. That would help explain why the finder definition in the SEC's various no-action letters on the subject usually has focused upon the extent of the services rendered, and not upon transaction-based compensation. It also explains why the SEC, in its response to Hallmark Capital, recommended that they look to the successful Country Business no-action letter for guidance."

Samuel Shafner, Co-Chairman, International Practice Group at Burns & Levinson LLP has concentrated his practice exclusively in the area of transactional corporate and securities law for more than twenty years. Mr. Shafner has particular expertise in assisting emerging technology companies, both domestic and international, in their capital formation as well as in basic business contract needs.