Staff at the U.S. Securities and Exchange Commission (“SEC”) recently confirmed that a “finder” receiving transaction-based compensation for introducing interested investors to an issuer is performing the functions of a “broker” and must be registered. The SEC was responding to a no-action request by a law firm, Brumberg, Mackey & Wall, P.L.C. (“BMW”) that was proposing to introduce a client to contacts that might have an interest in investing in the client. BMW was to be compensated based upon a percentage of the amounts raised from any of these contacts.
In the United States, Section 3(a)(4)(A) of the Securities Exchange Act of 1934 generally defines the term “broker” as any person engaged in the business of effecting transactions in securities for the account of others. The SEC reminded BMW of its long standing position that the receipt of transaction-based compensation may alone be sufficient to show that a person is “engaged in the business” of effecting securities transactions. In addition to this “hallmark of broker-dealer activity”, the SEC said it believed that BMW’s proposal to introduce persons that “may have an interest” in financing the client would involve “pre-screening” potential investors to determine eligibility and interest, and “pre-selling” investors in an effort to gauge their interest in being introduced. The SEC felt that these factors, coupled with the provision for transaction-based compensation, would give BMW a “salesman’s stake” in the proposed transactions and create incentive for BMW to engage in sales efforts. For these reasons, the SEC concluded that BMW would be required to register as a broker-dealer before engaging in the proposed activities.
The position taken by the SEC applies to activities, persons resident and the law as applicable in the United States. The law may be different as it relates to activities outside the U.S.