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Published: 2008-03-26

Finders' Fees and Securities Laws



Over the past year, I have received numerous telephone calls from clients and have participated in several discussions with colleagues regarding the issue of whether a third party may collect finders fees for introducing potential investors to corporations seeking venture and/or other forms of capital financing.

These situations typically involve third parties who seek an ownership interest in the corporation, shares of the corporation's stock, or cash fees for bringing investors and their money to a corporation. Some may attempt to rationalize what such providers or finders do by using the following analogy: if people pay fees to accountants and lawyers for their valuable professional services, what could be wrong with giving up a piece of equity in a corporation or paying a cash fee to a third party who provides such a valuable professional service as bringing equity investors to the corporation?

The answer is simple. When corporations or individuals hire accountants and/or attorneys, these types of professionals are licensed and regulated by governing bodies that set educational, training and ethical standards to regulate them. However, individuals who act as promoters and/or finders and who seek finders fees should be held to similar standards. Generally speaking, federal and Ohio securities laws effectively prohibit finders or promoters from engaging or professing to engage, directly or indirectly, in the purchase or sale of securities with the expectation of receiving a commission, fee or other compensation as a result of such purchase or sale, unless they are properly licensed to engage in such activities.

If a promoter or finder who is not properly licensed introduces a corporation to individuals or entities willing to make an equity investment in the corporation, and the corporation provides such promoter or finder with a fee payable in cash, stock or otherwise, then the promoter or finder may be subject to civil liability and/or criminal prosecution under federal and Ohio securities laws. Civil damages may include any fees paid for the advice of the promoter or finder, any loss due to such advice, court costs and any income derived as a result of such advice. In Ohio, an afflicted individual may bring an action for civil liability for such a violation within four (4) years after the investment advice is rendered or two (2) years after discovery of facts which constituted such violation, whichever is shorter. If the promoter or finder is subject to criminal prosecution, such individual may be subject to felony charges and/or criminal fines that vary depending upon the value of the funds or securities involved.

In addition, any sale made in violation of Ohio securities laws is voidable in its entirety by the purchaser (the new equity investor). Also, the corporation, as seller of its shares of stock and any participants involved in the sale of stock are jointly and severally liable for the full amount paid by the equity investor to the corporation, along with any court costs such investor has incurred.

There are individuals who are properly licensed as securities brokers or dealers who can provide the same services as a finder and/or promoter. By using properly licensed individuals and/or entities to provide the same services as a finder or promoter, a corporation looking for capital can eliminate its liability for using a promoter or finder to locate capital.

Joel S. Heiser is an attorney at Arter & Hadden LLP and is a member of the firm's E-Group. The E-Group is a multi-disciplinary group of attorneys who focus their practice on entrepreneurs, Internet, e-commerce and emerging growth companies. Joel can be reached at 216/696-5665 or jheiser@arterhadden.com. For additional information about the E-Group and to read SBN "Matter of Law" reprints, please visit our website at: http://www.arterhadden.com/egroup.

Reprinted with permission by SBN magazine