Understanding Securities Law
The business professional's guide to securities laws
 

You need capital to grow your business.

You cannot find that capital on your own.

So you want to hire someone to help you raise money.

Who can you legally hire and pay commissions or fees to if they help you raise money?

ANSWER:  You may only pay a commission or some other form of transaction based compensation, meaning compensation that is based upon the success of your actually raising money, to an entity that is registered broker/dealer.

It is easy to tell if an entity is in fact a registered broker/dealer. Just go to the website for the Financial Industry Regulatory Authority, or FINRA, and look it up. Here: http://www.finra.org/Investors/ToolsCalculators/BrokerCheck/index.htm

This is useful because you can also search to see if the broker/dealer or the persons you are dealing with at the broker dealer have ever had any legal or regulatory problems.

A word of caution here:  The commission or fees must be paid to the broker/dealer entity and not directly to the persons working for the broker dealer.

You cannot pay "finders," "business brokers," and other similar individuals or firms to help you raise money

Individuals and firms that are not registered broker/dealers may offer to provide you with one or more of the following services if you pay them a commission or any other fee based upon the success of the transaction: 

• Finding investors, even in a "consultant" capacity
• Making referrals to investors
• Engaging in, or finding investors for private placements
• Effecting securities transactions for the account of others for a fee, even when those other people are friends or family members
• Acting as "independent contractors," but are not "associated persons" of a broker-dealer
• In general, these persons are all acting as unregistered broker/dealers in that they:
• Participate in important parts of a securities transaction, including solicitation, negotiation, or execution of the transaction
• Receive compensation for participation in the transaction depending upon, or related to, the outcome or size of the transaction or deal or other transaction-related compensation

ALL OF THESE ACTIVITIES ARE ILLEGAL.

DO NOT SIGN A CONTRACT WITH ANYONE OTHER THAN A FINRA REGISTERED BROKER DEALER TO PROVIDE YOU WITH THESE SERVICES.

If you do, you are breaking the law and could suffer sever penalties.

Your Officers, Directors and Employees

The SEC has a special rule allowing you and other officers, directors and employees of your company to sell your securities without registering as a broker/dealer.

Under this rule you and other officers, directors and employees of your company, called “associated persons” of the issuer by the SEC, can sell your company’s securities without registering as a broker/dealer if such person:  

• Is not subject to a statutory disqualification such as participation in securities activities for which they were sanctioned or found guilty;
• Is not compensated in connection with his participation by the payment of commissions or other remuneration based either directly or indirectly on transactions in securities; and
• The associated person meets all of the following conditions:
  • The associated person primarily performs, or is intended primarily to perform at the end of the offering, substantial duties for or on behalf of the issuer otherwise than in connection with transactions in securities; and
  • The associated person was not a broker or dealer, or an associated person of a broker or dealer, within the preceding 12 months; and
  • The associated person does not participate in selling an offering of securities for any issuer more than once every 12 months other than in reliance this rule.
  • The associated person restricts his participation to any one or more of the following activities:
  • Preparing any written communication or delivering such communication through the mails or other means that does not involve oral solicitation by the associated person of a potential purchaser; Provided, however, that the content of such communication is approved by a partner, officer or director of the issuer;
  • Responding to inquiries of a potential purchaser in a communication initiated by the potential purchaser; Provided, however, That the content of such responses are limited to information contained in a registration statement filed under the Securities Act of 1933 or other offering document; or
  • Performing ministerial and clerical work involved in effecting any transaction.

 
Remember, neither you nor any of your officers, directors or employees participating in an offering of your securities may be paid a commission or any other form of special compensation for raising money in order to meet this rule.

Why is this all so important?

First, you don’t want to break the law.

But this is also important because unless your company has significant revenues and profits, a FINRA broker/dealer won’t raise money for your company.

Thus, desperate for money, you turn to people who promise they can help you raise money. But they aren’t registered broker/dealers. So any payment to them is illegal.