SEC Sanctions Finder’s Fees by non-Broker-Dealer

By  CrowdFundBeat , Sr. contributing guest editor, partner in the corporate law department of Taylor English  LLP

In a consent judgment announced recently the SEC re-emphasized its position that parties who are not licensed as broker-dealers are prohibited by securities laws from accepting so-called finder’s fees for connecting investors with securities issuers.

In its consent judgment in In re IREECO, LLC, the SEC described IRRECO, LLC and certain named affiliates who ran a business in which they assisted prospective investors in EB-5 transactions with regional centers who were seeking investors for EB-5 project financings.  The EB-5 program is one that allows non-U.S. citizens to make an investment of at least $500,000 in a business in the U.S. that meets certain requirements pertaining to job-creation.  If the proposed project is approved, the investors in the project become eligible to obtain green cards or other visa rights in the U.S.

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Project developers often struggle with requests from deal facilitators and other entrepreneurs who claim to have the ability to connect the developer with investors. Because the project developers are trying to raise cash, they often want to pay a fee to such facilitators that is dependent on the closing of an investment.  Often such finder’s fees are described as a percentage of the funds raised from the investors identified.

For several decades the SEC has taken the position that any finder’s fee in a securities transaction that is paid to a party that is not a broker-dealer (or not otherwise able to take advantage of an exemption from the broker-dealer licensing requirement) is illegal because of the finder’s lack of a broker-dealer license.

Because its thinking on the topic has been embedded in consent orders the SEC has reached with parties who were subject to administrative enforcement, there have been very few published court opinions on the subject.  Consequently, while there might be decent legal arguments against such a result, those arguments have not been aired in court and courts have not had much of an opportunity to clarify the law.

The SEC’s position in the IREECO case clarifies that its thinking has not changed and that the SEC continues to view finder’s fees as a form of compensation that can only be collected by a licensed broker-dealer.

Jonathan-B-Wilson-

 

 

 

Jonathan B. Wilson is a partner in the corporate law department of Taylor English Duma where he represents growing companies in finance, securities and technology matters. He can be reached at jwilson@taylorenglish.com.

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