Entrepreneurs, company executives, and private equity fund sponsors with a growing enterprise, innovative idea, or a new fund often find themselves needing help when it comes to raising capital to fund the new enterprise. As a result, they often turn to friends, colleagues and others with experience raising capital. These people frequently offer to help the enterprise raise capital or they suggest working with someone who has helped them raise capital in the past. Often times, the person agreeing to help raise capital (sometimes referred to as a “finder”) will agree to provide access to his or her contacts in exchange for a commission payment based upon the amount of capital raised.
Satisfied that this “finder” can help raise the necessary funds, the entrepreneur, company executive, or equity fund sponsor continues operating his or her business and lets the finder “do his thing” by making contacts with individuals interested in investing. What these parties often fail to recognize is the danger that such a relationship can present. Federal and state securities laws may not permit activities that are commonly thought of as “finding” activities, and securities regulators have acted to punish both finders and employers of finders for engaging in broker-dealer activities without registration.
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