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Payment of Finder’s Fees for Securities Sales in California

California’s new law permitting payment of finder’s fees to middlemen in securities purchases creates new business incentives within the state. However, the law contradicts a long-held Securities and Exchange Commission policy against finder’s fees. Essentially, California has legalized payment of compensation to people who refer or introduce an investor to an issuer of securities or vice versa. The referral or introduction must be made “solely for the purpose of a potential offer or sale of securities of the issuer in an issuer transaction in this state”. California Corporations Code § 25206.1.

The law also provides a long list of activities that a finder cannot do in order to remain exempt from securities broker-dealer requirements, such as:

  • The total transaction or series of related transactions in which the finder is involved cannot exceed a sale price of $15 million.
  • The finder cannot participate in negotiating the sale.
  • The finder cannot make any recommendations or give advice about the sale or the securities to the parties to the sale.
  • Any securities from the issuer that the finder owns cannot be sold or offered for sale as part of the transaction.
  • The finder cannot have possession of any funds connected with the transaction.

California Corporations Code §§ 25206.1(a)(1)-(8), (b); 25210.

In other words, the finder is a true middleman whose only job is conveying basic information about the security to the investor, such as the price and type of securities offered by the issuer in exchange for a finder’s fee. California Corporations Code § 25206.1(a)(8). Finders must also file a notice with the California Department of Business Oversight before engaging in connecting issuers with investors. California Corporations Code § 25206.1(c).

Although California now allows payment of finder’s fees, the SEC treats this action as a violation of the Securities and Exchange Act, Section 15(a). See, e.g., Letter from SEC to Brumberg, Mackey & Wall, P.L.C. re Denial of No-Action Request, dated May 17, 2010. Not everyone agrees with the SEC: at least one court decision cautions against a blanket ban on compensation to a finder for a referral leading to a transaction. SEC v. Kramer, 778 F.Supp.2d 1320 (M.D. Florida 2011). Issuers, investors, and finders should use great caution when engaging in transactions conducted outside California or between California and another state.

If you are wondering whether payment of a finder’s fee is appropriate in your securities transaction, seek out an attorney to advise you and protect you from liability. Michael Leonard, Esq., of San Diego Corporate Law, named a “Rising Star” for 2017 by SuperLawyers, has the experience and the insight to evaluate California securities transactions. To schedule a consultation, e-mail San Diego Corporate Law or call Mr. Leonard at (858) 483-9200.

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