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"Finders Keepers, Users Weepers" - Joy S. Newborg

Winthrop & Weinstine, P.A., attorney Joy S. Newborg has authored a featured article on the potential pitfalls of using a finder to raise capital. The article, “Finders Keepers, Users Weepers,” was published on two Web sites, Business Xpansion Journal and Global Corporate Xpansion, in September 2009, in Minnesota Business in December 2009, and in NorthWestern Financial Review in February 2010.
 
Click on the link to read “Finders Keepers, Users Weepers.”

Finders Keepers,
Users Weepers?


If you are a company needing funds to start or grow your business, you may have found it very difficult to raise capital on your own, especially given the current economic conditions. So you may think you are very fortunate when you are approached by someone who promises that she can help you raise money and already has several potential investors in mind. Sounds too good to be true? Maybe, and engaging her as a “finder” entails hidden risks that can result in harsh consequences if you are not careful.
 
Differences Between A Finder And A Broker-Dealer? 
A broker-dealer is a person who is in the business of effecting transactions in securities for the account of others. In regards to raising capital, this means assisting you with your offering of shares, warrants, debentures or other securities to potential investors.  
 
Basically, a finder can do no more than pass the names and contact information of potential investors onto you. For this reason, a finder is excluded from the federal and state registration requirements of broker-dealers. If a finder takes on more duties, the risk that the finder will be considered a broker-dealer requiring registration becomes greater. When using a finder, the following must be avoided:
 
1. Transaction-based compensation. It is a tell-tale sign of a broker-dealer. The compensation must be in another form, such as a fixed fee or hourly fee, and cannot be conditioned on any sale(s) actually occurring.
 
2. Involvement in solicitation and negotiation. A finder cannot recommend the purchase of securities to investors, negotiate the terms of the sale of securities, assist in drafting private placement memorandums or other offering materials, perform or coordinate due diligence, participate in investor meetings or handle investor funds, among other things.
 
3. Frequent finder. If someone has acted as a finder more than once, she may be deemed a broker-dealer as it may be her core business.
 
Why Should This Matter To Me? Isn't This Only The Finder's Problem?   
No, if you have engaged an unlicensed broker-dealer to assist in selling securities, you have violated securities laws and your consequences can be severe, including:  
 
1. Investors' right to rescind sales. Every sale would be voidable, meaning investors may rescind their sales and you would have to return their money plus interest, costs and attorneys fees. If you are like every other small business, you probably have long spent that money.
 
 
2. Civil and criminal penalties.
 
3. Loss of state exemptions regarding the sale of securities. Many state limited offering exemptions prohibit paying anyone compensation for the sale of securities unless they are registered broker-dealers. Therefore, you may be prevented from relying on such exemptions and may be in violation of the states' laws if you did not register the offering prior to sales in such states.
 
4. Exit strategy problems. If you anticipate selling the business or entering into a merger sometime in the future, securities violations may be a roadblock with potential acquirers.
 
How Can Officers Help With Our Capital Raising Efforts Then? 
Officers assisting with a company's offering of securities are generally exempt from broker-dealer registration requirements if they do not receive any additional compensation for their efforts. However, you cannot make a finder an officer in order to avoid registration because she would have to have legitimate duties other than raising capital and cannot receive compensation (especially transaction-based compensation) for her assistance in raising capital.  
 
Conclusion 
Using a finder can have its hazards, but may be the only way to help locate investors. If you decide to engage the services of a finder, you should strictly limit her activities to those appropriate to a finder in a written agreement, which includes indemnification provisions if she breaches such restrictions, as well as seek the assistance of an experienced securities attorney.

Published by Business Xpansion Journal, Global Corporate Xpansion, Minnesota Business, and NorthWestern Financial Review.
For More Information
Deb Cochran
Direct: (612) 604-6688
"Finders Keepers, Users Weepers" - Joy S. Newborg
 
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