Yesterday, I wrote about a recent no-action letter issued by the SEC’s Division of Trading and Markets with respect to “M&A Brokers”. Here in California, the legislature is considering a bill, AB 713 (Wagner) that would exclude “finders” from the definition of “broker-dealer” in Section 25004 of the Corporations Code. Late last month, the bill passed out of the Assembly on a 73 to 1 vote (with 6 members not voting).
The current version of the bill would define a “finder” as follows:
An individual who introduces or refers one or more accredited investors, as that term is defined in Rule 501(a) of Regulation D under the Securities Act of 1933 (17 C.F.R. 230.501(a)), to an issuer or an issuer to one or more accredited investors, solely for the purpose of a potential sale of securities of the issuer, and who does not (i) participate in negotiating any of the terms of the securities transaction; (ii) advise any party to the securities transaction regarding the merits of, or the advantages or disadvantages of entering into the securities transaction; or (iii) sell or intend to sell any securities of the issuer, which securities are owned, directly or indirectly, by the finder as part of the securities transaction.
The bill would also impose two notice filing requirements – one before engaging in any finding activities and one for each securities transaction. The finder would also be required to obtain the informed written consent of potential investors and to maintain specified records. Finders would be prohibited from:
directly or indirectly take possession or custody of funds related to the purchase and sale of any subject securities transaction;
knowingly participate in any unregistered offering not otherwise exempt from registration or qualification;
fail to make the required disclosures;
conduct due diligence on behalf of the issuer or the potential accredited investor related to any subject securities transaction; and
make any disclosures to potential accredited investors other than disclosures expressly permitted or required under the exclusion.
In my view, the drafting is a little rough. For example, the bill incorrectly states “An individual who fails to comply with the requirements of this paragraph shall not be entitled to rely on the exemption afforded hereunder”. The bill may have the effect of an exemption, but it isn’t an exemption. It is an exclusion from the definition of “broker-dealer”. This isn’t a trivial distinction. Some provisions of the Corporations Code apply to licensed broker-dealers while others apply simply to broker-dealers. Compare, e.g., Corporations Code Sections 25243 and 25243.5. Another awkward provision is the prohibition on participation in an “unregistered offering”. In California parlance, an offering must be ”qualified”. Registration, on the other hand, is a concept under the Securities Act of 1933. The use of the term “registered” thus introduces an element of uncertainty. Does the legislature mean unregistered only under the Securities Act or does it mean both?