Finder's Keepers?

Joseph W. Bartlett, Founder of VC

The coming storm in the early stage finance universe, in my opinion, has to do with an expected action by the SEC moving in on so-called 'finders' of private equity, including agents acting for budding entrepreneurs in the early stage space. According to the legal 'Bible' on venture capital, Loss & Seligman, Securities Regulation, individuals and companies can operate without registration as a broker/dealer under the Securities Exchange Act of 1934, if they limit their activities. The exact quote from the 'Bible' is as follows:

'Although a pure finder may 'induce the purchase or sale of' a security within the meaning of 15(a), he or she is not normally a 'broker' because he or she effects no transactions, but merely brings buyer and seller together.'

To date, the SEC and the courts have not been particularly active in attempting to articulate the distinction between a finder and an unregistered broker/dealer. There are no bright line rules . how much 'finding' of capital for customers is too much. However, the definition of a broker/dealer in the `34 Act is quite broad. It defines a broker as: '[a]ny person engaged in the business of effecting transactions in securities for the account of others '.

The Act, 15(a)(1), further requires the registration of any broker or dealer that elects to: 'effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security'.

The expectation is that, with the SEC's increasing concern about private placements over the internet which border on the fraudulent, there is likely to be a prominent and widely publicized move of some kind by the SEC staff in this area. And the expectation is that the window through which an individual or business claims that it is a finder, versus an unregistered broker/dealer, will be considerably narrowed.

Many of the current finders will be required to register or go into some other line of business or, in the worst case, to face an enforcement action by the SEC. The registration process for a broker/dealer license is intensive, thorough and takes from four to six months. Whether the expected SEC action actually cuts down the opportunities for worthy entrepreneurs to find money with the assistance of an agent, or substantially crimps the incidence of potentially fraudulent deals, or a combination of both, remains to be seen.