Although the use of money finders is prevalent, particularly among smaller businesses seeking capital, many finder arrangements involve the type of activities and compensation structures that would cause the finder to come within the definition of a broker-dealer. While some finders who cross the broker-dealer line do so without any appreciation of the regulatory risks involved, most recognize that they are probably operating illegally but take comfort in the apparent infrequency of enforcement of broker-dealer laws by regulators. Other finders seek to re-characterize the services they provide as not involving the sale of securities. However, a recent SEC enforcement action serves as a stark reminder that securities regulators, when they do act, will look only to the substance, and not the form, of a finder arrangement in determining whether registration as a broker-dealer was required.
The subject of the SEC enforcement action, who was not registered as a broker-dealer, entered in to oral agreements to solicit investors in two separate private offerings in exchange for transaction-based compensation. In an apparent attempt to conceal the true nature of the services he provided, the respondent executed or caused to be executed backdated written agreements following the closing of the transactions that characterized the services to be provided as “strategic consulting services” (later amended to a generic reference to “consulting services”) in the first engagement and “general services” in the second engagement. Notwithstanding the references to consulting and general services in the written agreements, the SEC found that the respondent received transaction-based compensation solely for his selling efforts. Because of his compensation arrangement and solicitation activities, the SEC found the respondent’s actions with respect to the two companies exceeded those of a “money finder” and instead were actions of a broker-dealer in violation of the Exchange Act.
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