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Finders and the

Securities

Industry.

From: JSBarkats PLLC

www.JSBarkats.com

Date: 4/22/2011

Authors: Sunny J. Barkats, Esq., Managing Partner at JSBarkats PLLC a New York based

boutique Corporate and Securities full service law firm.

Re: The Use of Finders in the Securities Industry – Applicability of the

Broker-Dealer Registration Requirement under the Securities and

Exchange Act of 1934, (with specificity in NY state)

Introduction

The use of finders to identify potential business opportunities is pervasive

throughout the securities industry, particularly by small issuers interested in raising

capital, but which, because of their size, are “shut out” from access to traditional Wall

Street institutions.1 The basic function of a finder is that of bringing parties together that

will then themselves independently consummate a potential business or investment

relationship.2 To the extent that the activities of the finder exceed the basic function of

bringing a purchaser and a seller together, or go beyond a merely introductory role, the

finder may be required to register as a broker-dealer under the Securities and Exchange

Act of 1934 (the “1934 Act”), as well as potentially be required to obtain a license to

function as such under the blue-sky laws of the applicable jurisdiction.

1 See generally Dan Kolber, How to use finders in raising capital, ATLANTA BUS. CHRON., May 23, 2003,

available at http://atlanta.bizjournals.com/atlanta/stories/2003/05/26/smallb7.html (last visited June 9,

2004). 2 See e.g., Hasekian v. Krotz, 268 Cal.App.2d 311, 321 (Cal. Ct. App. 1968) (Describing a finder as a

person who “finds, interests, introduces and brings parties together for the deal which they themselves

negotiate and consummate.” (Emphasis in the original.))

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Registration and licensing can be expensive and time-consuming, and will subject

the finder to considerable oversight, including ongoing monitoring by the Financial

Industry Regulatory Authority (“FINRA”).3 In addition, the finder will become subject to

extensive record-keeping requirements,4 rigorous net capital obligations to protect

customers against the broker-dealer‟s risk of insolvency,5 periodic filing requirements,

6

and continuous education program requirements.7 Thus, there is a great attraction towards

maintaining an unregistered status even when required to register under federal law or

obtain a state license. However, as discussed below, the consequences of indulging in an

unregistered or unlicensed status when such status is not legally available may be vast,

not only for the finder itself, but for parties in a business relationship with the finder.

The finder may serve as an intermediary in a variety of contexts. A company may

use a finder to identify investors or suitable merger partners. Alternatively, a registered

broker-dealer may use an unregistered finder to, for example, dispose of a block of stock,

or to solicit clients or obtain client referrals. To the extent that the finder wishes to avoid

the registration requirement, it must structure its activities and its contractual

relationships carefully. A failure to do so may subject the finder to a variety of penalties,

including civil or criminal penalties under federal or state law for operating as an

unregistered broker-dealer. The persons using the services of the unregistered finder may

also be subject to sanctions. An issuer may face the consequences of rescission of any

transaction effected with the assistance of a finder that should have been, but was not

registered as a broker-dealer at the time of the transaction was executed. A broker-dealer

relying on the services of such a finder may be subject to disciplinary action for sharing

commissions with an unregistered broker-dealer.

Part I of this article will discuss the circumstances that may require a finder to

register as a broker-dealer under the federal securities laws, and the considerations that

should be taken into account when structuring the activities or contractual relations of an

unregistered finder to ensure that registration is not required. Part II will address the state

law registration requirements for persons acting as finders. Because of the heavy

concentration of securities industry professionals in and around the New York City area,

this article will primarily focus on New York State law. However, no similarities with the

laws of other states should be assumed. The practitioner is well-advised to look to the

blue-sky law of the relevant jurisdictions for any peculiarities or divergences from the

generally rigorous standards imposed by New York law. In Part III, the article will

examine the potential impact of a finder‟s failure to register when required to do so. The

impact under federal law will first be addressed, followed by the impact under New York

State law. The potential consequences to the finder, as well as those parties doing

business with the finder, including issuers, broker-dealers, and investors, will all be

discussed. The article will also address the potential impact under FINRA rules and

3 See generally COUDERT BROTHERS, INTRODUCTION TO U.S. BROKER-DEALER REGISTRATION AND REGULATION

(2000). 4 See SEC Rules 17a-3 and 17a-4 (2004).

5 See SEC Rule 15c3-1 (2004).

6 See SEC Rules 17a-5, 17h-1T and 17h-2T (2004).

7 See e.g., FINRA Rule 1120 (2004) (“Continuing Education Requirements”) available at

http://FINRA.complinet.com/FINRA/display/index.html (last visited June 11, 2004).

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regulations for a registered broker-dealer doing business with a finder that failed to

register when required to do so. Finally, the article will briefly discuss the

recommendations of the American Bar Association‟s Report and Recommendations of

the Task Force on Private Placement Broker-Dealers, the status of such

recommendations to date as well FINRA‟s new Series 79 exam.

I. Circumstances Requiring the Broker-Dealer Registration of a Finder

A person acting as a broker or dealer must register with the SEC and join the

FINRA.8 Section 15(a)(1) of the 1934 Act sets forth the basic requirement:

It shall be unlawful for any broker or dealer which is either a person other than a

natural person or a natural person not associated with a broker or dealer… to

make use of the mails or any means or instrumentality of interstate commerce to

effect any transactions in, or to induce or attempt to induce the purchase or sale

of, any security [other than certain exempted securities] unless such broker or

dealer is registered…9

A “broker” is defined as “any person engaged in the business of effecting transactions in

securities for the account of others.”10

A “dealer” is generally defined as “any person

engaged in the business of buying and selling securities for such person‟s own account

through a broker or otherwise.”11

The applicability of the registration requirements is of particular importance to

firms which act as finders or financial intermediaries in securities transactions.12

Finders

who may be “brokers” under the federal securities laws, and who may therefore be

required to register, include: (a) those in the business of identifying companies suitable

for merger or acquisition in deals that might be accomplished through the sale of

securities (so-called M&A advisory firms), (b) those in the business of directing

customers to registered broker-dealers, and (c) those in the business of finding investors

for companies that need capital.13

These finders have frequently argued that they should

not be considered statutory “brokers” because they do not “effect” transactions for others

within the meaning of Section 15(a)(1) of the 1934 Act – they merely locate potential

buyers or sellers of securities, and leave the negotiation and execution of the transactions

to those parties.14

Under certain circumstances, the outer limits of which have unfortunately not

been well defined, the SEC allows an exemption from the registration requirement for a

8 See 15 U.S.C. §§ 78o(a)(1), 78o(b)(8) & 78o-3 (2003).

9 15 U.S.C. § 78o(a)(1)(2003).

10 15 U.S.C. § 78c(a)(4)(2003) (Emphasis added).

11 Id. at (a)(5).

12 See e.g., Fulham & Co., SEC No-Action Letter, 1972 WL 9129 (Dec. 20, 1972).

13 See e.g., Securities Investor Protection Corp., SEC No-Action Letter, 1973 WL 9068 (July 14, 1973);

John T. Goggin, SEC No-Action Letter, 1973 WL 20411 (Feb. 6, 1973); Fulham & Co., SEC No-Action

Letter, 1972 WL 9129 (Dec. 20, 1972). 14

See David A. Lipton, A Primer on Broker-Dealer Registration, 36 CATH. U.L. REV. 899, 928 (1987).

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person who “merely” acts as a finder. In May-Pac Management Company, for example,

the staff of the SEC noted that –

This Office in the past has expressed the view that individuals who do

nothing more than bring merger or acquisition-minded persons or entities

together and do not participate in negotiations or settlements probably are not

brokers or dealers in securities and would not be required to register with the

Commission. On the other hand, persons who play an integral role in negotiating

and effecting mergers or acquisitions that involve transactions in securities

generally are deemed to be either a broker or a dealer, depending upon their

particular activities, and are required to register with the Commission.15

SEC guidance on this issue has sometimes been either unnecessarily complex or

even downright contradictory. However, despite the fickleness of the SEC, a finder

whose securities-related activities are sufficiently limited can safely expect the exemption

from registration to apply.

Whether a finder would be considered a broker and, therefore, be required to

register, depends on a variety of factors, none of which – and no combination of which –

appears to be clearly dispositive.16

These factors include, among others, whether the

finder: (a) participated in the negotiations for the sale of the securities, (b) discussed

details about the nature of the securities or made any recommendations, (c) prepared or

distributed sales literature, (d) advertised for prospective investors, (e) has public clients

rather than clients that are institutional or otherwise qualified investors, (f) was paid on a

commission basis linked to sales, (g) was acting as an agent for a registered broker-

dealer, and (h) was previously involved in sales of securities or participates with any

degree of regularity as a finder in such sales.17

A. Participating in the negotiations for the sale of the securities.

A finder involved in negotiations is much more likely to be required to register as

a broker-dealer than a finder which does not participate in any such negotiations. In

Dominion Resources, Inc., for example, the staff of the SEC withdrew a 1985 no-action

letter to a company claiming status as a finder but that had “also planned to participate in

negotiations.”18

In Mike Bantuveris, the staff of the SEC refused a no-action letter to a

consulting firm acting as an unregistered finder based “on the fact that the consulting firm

would do more than merely act as a finder in bringing together the parties to transactions

involving the purchase and sale of securities; the firm proposes to negotiate agreements

involving transactions in securities, to engage in further activities to consummate the

transactions, and to receive fees for its services that would be proportional to the money

15

SEC No-Action Letter, 1973 WL 10806 (Dec. 20, 1973). 16

See generally, Lipton, supra note 14, at 927-28. 17 See id., Charles Schwab & Co., Inc., SEC No- Action Letter, 1996 WL 762999 (Nov. 27, 1996); Victoria

Bancroft, SEC No-Action Letter, 1987 WL 108454 (Aug. 9, 1987); John DiMeno, SEC No-Action Letter,

1979 WL 13717 (Apr. 1, 1979); Mike Bantuveris, SEC No-Action Letter, 1975 WL 10654 (Oct. 23, 1975),

SEC v. Margolin, 1992 WL 279735, 5 (S.D.N.Y. 1992). 18 SEC No-Action Letter, 2000 WL 669838 (March 7, 2000).

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or property obtained by its clients and would be contingent upon such transactions in

securities.”19

The staff of the SEC has also advised that, where the finder acts as an agent for an

issuer in soliciting purchasers for a negotiated sale, registration may be required in light

of the finder‟s overall activities. In Benjamin and Lang, Inc., the staff of the SEC

explained that, “[I]f the [finder] acted as an agent for the issuer in soliciting purchasers

for a sale of municipal securities on a negotiated basis, as opposed to acting as a

consultant to the issuer in negotiations with an issuer-selected purchaser, the [finder]

would be considered to be „effecting transactions in securities,‟ which would require the

Firm to continue its registration with the Commission as a broker.”20

The activities of the

finder for which a no-action position was requested in Benjamin and Lang, Inc. were

extensive, and sometimes included “assist[ing] issuers in conducting negotiated sales.”21

Accordingly, solicitation activities by a finder on behalf of issuer should be conducted to

proscribe any role whatsoever by the finder in any ensuing negotiations with prospective

investors. An issuer that cannot monitor or control the activities of an unregistered finder

acting on its behalf would be well-advised to sever the relationship.

Conversely, limited or no participation in any meetings, discussions, or any other

course of dealing between the parties following their introduction by the finder weighs in

favor of an exemption from registration. In Victoria Bancroft, the staff of the SEC

granted a no-action letter to a finder that was not registered as a broker-dealer where the

function of the finder would be limited to merely the introduction of the parties; the

finder in no way participated in the establishment of the purchase price, nor any

negotiations between the parties; the finder did not participate in the preparation of any

materials related to the sale or purchase; and the finder performed no independent

analysis of the transaction nor did she engage in any due diligence activities.22

On the

other hand, in John R. Wirthlin, the staff of the SEC declined an exemption from broker-

dealer registration to a finder who, among others, would be “arranging and attending the

first meeting between the registered representative and professionals that are interested in

discussing such investments based on [finder‟s] solicitation.”23

Similarly, in Davenport

Management, Inc., the staff of the SEC advised that a finder determined to be actively

involved in securities transactions by negotiating their terms, providing advice regarding

their terms, or providing other assistance, including investment banking services in some

instances, would be required to register as a broker-dealer.24

B. Discussing details about the nature of the securities or making any

recommendations.

A finder should generally avoid discussing the details or the nature of the

19 SEC No-Action Letter, 1975 WL 10654 (Oct. 23, 1975). 20

SEC No-Action Letter, 1978 WL 13780 (Aug. 1, 1978). 21

See id. 22

SEC No-Action Letter, 1987 WL 108454 (Aug. 9, 1987). 23

SEC No-Action Letter, 1999 WL 34898 (Jan. 19, 1999). 24

SEC No-Action Letter, 1993 WL 120436 (April 13, 1993).

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securities being sold, should conduct and offer no valuations of such securities, should

make no recommendations, and should not hold customer funds or securities, either with

respect to the securities being offered or with respect to unrelated securities transactions.

In Russell R. Miller & Co., Inc., for example, the staff of the SEC granted no-action relief

from the broker-dealer registration requirements to a finder that did not negotiate, on

behalf of its client, the terms or conditions of any subsequent purchase or sale involving

securities; following identification of a potential buyer or seller, the finder did not deal

substantively with the other party on behalf of its client with respect to any matter; the

finder played no role in a client‟s determination of whether securities would be a part of

the consideration paid or received in any acquisition or the nature of securities to be

offered; and, “In short, [the finder] is retained to bring to bear its knowledge and

expertise to the task of identifying an acquisition prospect.”25

In Charles Schwab & Co.,

Inc., the staff of the SEC similarly granted no-action relief to online services that, among

others, would not handle customer funds or securities related to securities orders

transmitted to a registered broker-dealer or effect clearance and settlement of customer

trades.26

In light of those limited activities, the online services would not themselves be

acting as broker-dealers, and would therefore not be required to register as such.27

C. Preparing or distributing sales literature.

The finder should not become involved in the preparation of any sales literature,

accounting information or related documents, and should not actively distribute any such

documents – and should preferably not even make them directly available, other than, if

at all, transmitting such documents between the parties at either party‟s explicit request.

In International Business Exchange Corp., for example, the staff of the SEC advised that,

a business broker that never negotiated the terms and conditions of acquisitions to be

made for securities issued by the acquiring company, never advised the company to be

acquired or its shareholders as to the value of the securities to be issued in the acquisition,

and merely transmitted (as opposed to preparing) documents between the two parties was

not required to register as a broker-dealer.28

Likewise, in Charles Schwab & Co., Inc., the

staff of the SEC advised that the online services requesting no-action relief would be

acting as mere finders for registered broker-dealer, and, as such, not required to

themselves register as broker-dealers, where the broker-dealer would remain responsible

for the accuracy of all advertising and sales materials relative to broker-dealer‟s financial

services published by the online services; the online services and their employees would

not be allowed to describe broker-dealer‟s brokerage services to subscribers other than by

distributing these materials; and all advertising or sales material would clearly indicate

that the subscriber or user of any of the online services would be a brokerage customer of

the broker-dealer and not of any of the online services.29

D. Advertising for prospective investors.

25 SEC No-Action Letter, 1977 WL 10938 (Aug. 15, 1977). 26

SEC No-Action Letter, 1996 WL 762999 (Nov. 27, 1996). 27

See id. 28

SEC No-Action Letter, 1986 WL 67535 (Dec. 12, 1986). 29

SEC No-Action Letter, 1996 WL 762999 (Nov. 27, 1996).

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An unregistered finder should generally avoid advertising for prospective

investors. In Paul Anka, for example, the staff of SEC advised that a finder who did “not

participate in any advertisement, endorsement, or general solicitation in the United States

regarding investment… and has not participated, and will not participate, in the

preparation of any materials (including financial data or sales literature)” would not be

required to be registered despite being compensated through transaction-based

commissions.30

E. Having public clients rather than clients that are institutional or

otherwise qualified investors.

The advertising restriction will likely be loosened if the target of the finder‟s

solicitations is institutional, as opposed to public or otherwise non-qualified, investors. In

Financial Charters & Acquisitions, Inc., for example, the staff of the SEC advised that a

commission-based finder fee to introduce a broker-dealer to “financial institutions for the

purpose of facilitating the adoption and implementation by it of the [broker-dealer‟s

securities-based] hedging strategies” would not require the finder‟s registration as a

broker-dealer.31

Conversely, in SEC v. Margolin, the U.S. District Court for the Southern

District of New York determined that a finder which, among others, received transaction-

based compensation, publicly advertised for clients, and possessed client funds and

securities was required to register as a broker-dealer.32

F. Using sales-based commissions.

The appropriate structuring of the fee used to compensate the finder is of central

importance in avoiding registration for the finder as a broker-dealer. A fee for consulting

services rendered, whether on a retainer/lump sum, per referral, or hourly basis, would

probably not be found, in the context of otherwise appropriate circumstances, to require

the finder‟s registration as a broker-dealer. In Charles Schwab & Co., Inc., for example,

the use of a nominal flat fee for each order transmitted to broker-dealer through online

services acting as finders did not compel broker-dealer registration by the online

services.33

Similarly, in Redmond Associates, Inc., the fees paid by broker-dealers to tax

preparers and accountants for business referrals did not require the broker-dealer

registration of the tax preparers and accountants. The applicable fee schedule was found

by the SEC to “not depend on the amount of commissions or compensation received by

[the broker-dealer]. The referral fee will be paid only once for each account. Subsequent

contributions to the respective plans will not be the subject of any additional referral

fees.”34

30 SEC No-Action Letter, 1991 WL 176891 (July 24, 1991). 31

SEC No-Action Letter, 1984 WL 45923 (Nov. 25, 1984). 32

1992 WL 279735, 5 (S.D.N.Y. 1992). 33

SEC No- Action Letter, 1996 WL 762999 (Nov. 27, 1996). 34

SEC No- Action Letter, 1985 WL 55970 (Jan. 12, 1985).

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On the other hand, “[a]s a general matter, a person that receives a percentage of a

commission or transaction-based compensation would be required to register as a broker-

dealer.”35

The staff of the SEC has explained that, “Those persons engaged in effecting

securities transactions for the account of others, and particularly those persons who

receive a commission for their efforts based on the cost of the exchange of securities or

the amount of securities placed, are brokers or dealers in securities.”36

Accordingly, in

Henry C. Goppelt, the staff of the SEC advised that a fee structured as “a standard 5% of

the first $1 million of total consideration, 1% less on each subsequent $1 million, down to

1% of the remaining balance” would require the broker-dealer registration of a finder.37

Similarly, in Mike Bantuveris, the staff of the SEC denied no-action relief from the

broker-dealer registration requirements to a finder whose activities involved, among

others, the receipt of “fees for its services that would be proportional to the money or

property obtained by its clients and would be contingent upon such transactions in

securities…”38

In John R. Wirthlin, the staff of the SEC required a finder‟s broker-dealer

registration, in view of the fact that finder would “receive transaction-based

compensation, one of the hallmarks of being a broker-dealer.”39

In 2006 the SEC

continued this trend in John W. Loofbourrow Associates, Inc., with the staff refusing to

issue no action relief when the fee paid to a finder by Loofbourrow would be a

commission-like arrangement tied to the ultimate size of the amount of securities offered,

based upon if and when Loofbourrow successfully placed the securities.40

And, in 2008,

the SEC sanctioned Robert MacGregor, for conducting brokerage services and collecting

a fee tied to the amounts he helped raise in various PIPE transactions.41

Despite the strong language that the SEC has occasionally used in the past

regarding commission-based compensation for unregistered finders, there does not,

however, appear to be an absolute rule against the use of such compensation. In fact, the

use of a mixed fee consisting of a flat base plus a commission-based component has

frequently been found not to require the finder‟s registration as a broker-dealer. For

example, in Victoria Bancroft, the staff of the SEC granted no-action relief to an

unregistered finder using a variable compensation method.42

The fee in question was

represented to be “a flat fee or it may be a percentage of the purchase price. Sometimes it

may be the responsibility of the seller to compensate [finder] and sometimes it may be

the responsibility of the buyer. The parties consider [the] fee either a referral fee or a

finder‟s fee.”43

In H.C. Copeland and Associates Equities, Inc., the staff of the SEC

determined that independent consultants who would introduce a registered broker-dealer

to public employers for the possible sale of annuity plans were not required to themselves

register as broker-dealers, even though the consultants‟ compensation would be based on

a fixed annual fee for consulting services plus a bonus based upon a percentage of the

35 John M. McGivney Sec., Inc., SEC No-Action Letter, 1985 WL 54255 (May 20, 1985). 36

Securities Investor Protection Corp., SEC No-Action Letter, 1973 WL 9068 (July 14, 1973). 37 SEC No-Action Letter, 1974 WL 10669 (June 2, 1974). 38 SEC No-Action Letter, 1975 WL 10654 (Oct. 23, 1975). 39

SEC No-Action Letter, 1999 WL 34898 (Jan. 19, 1999). 40

SEC No-Action Letter, 2006 Lexis 523 (Jan. 29, 2006) 41

SEC No-Action Letter, 2005 Lexis 617 (May 17, 2005) 42

SEC No-Action Letter, 1987 WL 108454 (Aug. 9, 1987). 43

Id.

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first-year annuity contract commissions earned from specific annuity plans, in view of the

fact that consultants would not, among others, participate in any negotiations.44

Likewise,

in Russell R. Miller & Co., Inc., the staff of the SEC granted no-action relief to an

unregistered finder compensated through a fee paid on an hourly basis or “on a declining

percentage of the consideration paid or received if a purchase or sale subsequently

occurs,” depending on the specific type of work done.”45

Moreover, the SEC has occasionally found that even a fee that is entirely and in

all instances commission-based will not require the registration of a finder, in light of that

finder‟s otherwise limited securities-related activities, and, in particular, in the absence of

any role whatsoever in the negotiations between the parties introduced by the finder. In a

no-action letter requested by Paul Anka, for example, the staff of the SEC did not require

the finder‟s registration because, despite the clear use of transaction-based compensation,

the finder, Paul Anka (the famous 1960‟s singer), merely intended to provide to a

particular issuer-offeror the names of potential investors with whom he had a pre-existing

business or personal relationship.46

Even though the finder‟s fee was directly based on the

sales price of the limited partnership units sold through the finder‟s efforts, the staff

determined that the finder was not required to register as a broker-dealer because the

finder did not participate in any negotiations, did not provide other services to facilitate

the transactions, such as underwriting or preparing sales literature, did not make

recommendations to enter into the transactions, had not previously engaged in any public

or private offering of securities, and prospective buyers that were U.S. persons were

reasonably believed in all instances to be “accredited investors,” as defined in Regulation

D under the Securities Act.47

As to finders whose regular business and professional

activities are more closely aligned to the securities industry than those of Paul Anka,

however, the staff may well sing to a different tune.

Other no-action letters where the staff of the SEC has granted no-action relief

from the broker-dealer registration requirements to finders compensated through

transaction-based fees in light of the finders‟ limited securities-related activities include

Financial Charters & Acquisitions, Inc. and International Business Exchange Corp.48

In

Financial Charters & Acquisitions, Inc., the staff determined that, where the finder was

clearly participating in the transaction in a merely introductory role, and would not be

involved in hedging strategy selection, pricing or contract negotiations, a fee based on

33% of eligible gross income realized from an institutional contract would not compel the

registration of the finder. Similarly, in International Business Exchange Corp., the staff of

the SEC determined that a commission based on accepted selling price, computed on the

basis of gross asset value, would not require the finder‟s registration as a broker-dealer in

light of, among other things, the finder‟s “limited role in negotiations between the

purchaser and the seller.”49

44 SEC No-Action Letter, 1982 WL 29102 (April 8, 1982). 45 SEC No-Action Letter, 1977 WL 10938 (Aug. 15, 1977). 46

See Paul Anka, SEC No-Action Letter, 1991 WL 176891 (July 24, 1991). 47

See id. 48

1984 WL 45923 (SEC No-Action Letter) (Nov. 25, 1984). 49

SEC No-Action Letter, 1986 WL 67535 (Dec. 12, 1986).

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G. Acting as an agent for a registered broker-dealer.

Solicitation of potential clients for referral or “channeling” to particular broker-

dealers or specific mutual funds or other specific securities investments may require the

registration of the finder as a broker-dealer. A number of no-action letters have addressed

this issue. In John T. Goggin, for example, the staff of the SEC refused no-action relief to

an unregistered finder pursuing a scheme whereby the finder intended “to obtain the

names and addresses of certain dentists, doctors and lawyers and mail to such individuals

a card congratulating them on obtaining their respective degrees and indicate that, for

example, a specific broker-dealer would appreciate an opportunity to explain various

methods of investing to them…”50

In Leonard-Trapp & Associates Consultants, the staff

of the SEC advised that a marketing consultant intending to conduct dinner-seminars to

solicit potential customers for particular broker-dealer would itself be required to register

as a broker-dealer.51

In New York and American Stock Exchange Transactions, the staff

of the SEC similarly advised a restaurant with a unit showing New York and American

Stock Exchange transactions, along with “tie line phones to various brokerage houses”

that paid a fee to the restaurant, and which enabled customers to call the respective

broker-dealers, would itself be required to register as a broker-dealer.52

In John R.

Wirthlin, the staff of the SEC determined that the availability of an exemption from

broker-dealer registration is generally more limited for finders acting on behalf of

specific broker-dealers, as opposed to finders acting on behalf of issuers.53

On the other hand, Charles Schwab & Co., Inc., the staff of the SEC took a

seemingly inconsistent position. In that no-action letter, the staff granted relief from the

broker-dealer registration requirements to online services acting as finders for a

registered broker-dealer, despite advertising links to a registered broker-dealer and

regularly referring customers to that broker-dealer, where, among others, the online

services did not answer questions or engage in negotiations involving brokerage accounts

or related securities transactions, and did not accept orders, select among broker-dealers

or route orders for customers to markets for execution.54

The flexibility demonstrated in

this no-action letter reflects the SEC‟s ongoing attempts to adapt its regulatory

framework to emerging technologies, and may ultimately prove unavailable for

solicitations conducted through traditional, non-Internet-related media.55

H. Being previously involved in the sales of securities or participating

with any degree of regularity as a finder in such sales.

50 SEC No-Action Letter, 1973 WL 20411 (Feb. 6, 1973). 51 SEC No-Action Letter, 1972 WL 11035 (Aug. 25, 1972). 52 SEC No-Action Letter, 1971 WL 9613 (Sept. 5, 1971); see also Michael D. Barrett, SEC No-Action

Letter, 1972 WL 8544 (Aug. 25, 1972); Flexible Financial Marketing, Inc., SEC No-Action Letter, 1996

WL 636092 (Sept. 13, 1996). 53

SEC No-Action Letter, 1999 WL 34898 (Jan. 19, 1999). 54

SEC No- Action Letter, 1996 WL 762999 (Nov. 27, 1996). 55

See generally Use of Electronic Media, SEC Release Nos. 33-7856 & 34-42728, 65 FR 25843 (May 4,

2000) (Discussing the SEC‟s regulatory approach in the context of emerging technologies such as the

Internet).

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The regularity with which the finder engages, even if indirectly, in securities-

related transactions, or the extent to which the finder has engaged in such activities in the

past, may also be a determinative factor. The staff of the SEC is more tolerant of isolated

instances of securities-related activities by an unregistered finder, than of similar

activities undertaken in the regular course of business by a similarly situated finder. In

Paul Anka, for example, the staff granted no-action relief to an unregistered finder

representing that, “he has not previously engaged in any private or public offering of

securities (other than buying and selling securities for his own account through a broker-

dealer) and has not acted as a broker or finder for other private placements of

securities.”56

Similarly, in John DiMeno, the staff of the SEC advised that a finder would

not be required to register as a broker-dealer where he had not previously been engaged

in any private or public offerings of securities.57

This approach has been endorsed by the courts. For example, in Massachusetts

Financial Services, Inc. v. Securities Investor Protection Corp., the District Court of

Massachusetts held that, in determining whether a person is a broker-dealer, a primary

consideration is that person‟s regularity of engaging in securities activities, as opposed to

undertaking isolated instances of securities transactions.58

On the other hand, there may also be certain types of activities that tangentially

involve securities transactions, such as M&A consulting activity, but which, even if

regularly undertaken by an unregistered finder, may be more tolerable to the SEC than

activities of other types, as long as certain safeguards are observed. In Securities Investor

Protection Corp., for example, the staff of the SEC noted that, “This office… has

expressed its view that individuals who do nothing more than bring merger or

acquisition-minded persons or entities together and who do not participate, directly or

indirectly, in the distribution of the securities nor share in any profits realized, likely are

not brokers or dealers in securities and may not be required to register as such.”59

The SEC may also consider the finder‟s securities industry regulatory or

disciplinary history, if any.60

I. Recent Developments.

The two most recent developments on the finders‟ exemption provide little

additional guidance on the registration requirements for finders, but do indicate a

narrowed view by the SEC and its staff of the exemption‟s applicability. One such

development involves the SEC‟s imposition of sanctions on Ram Capital Resources, LLC

(“RAM”); the other is the denial of no-action relief to Brumberg, Mackey & Wall, P.L.C.

(“BMW”).

56

SEC No-Action Letter, 1991 WL 176891 (July 24, 1991). 57

SEC No-Action Letter, 1979 WL 13717 (April 1, 1979). 58

411 F.Supp. 411, 415 (D. Mass. 1976). 59

SEC No-Action Letter, 1973 WL 9068 (July 14, 1973). 60 See e.g., SEC v. Milken and MC Group, 1998 SEC LEXIS 323 (Feb. 26, 1998).

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On June 19, 2009, the SEC announced a settlement of an administrative

proceeding against Ram and its principals Michael E. Fein and Stephen E. Saltzstein , for

acting as unregistered brokers.61

From 2001 through 2005, Ram through its principals,

was alleged to have engaged in various activities in connection with services it provided

to investors in the private investments in public equities (“PIPEs”) market. Such

activities included identifying potential PIPE offerings; soliciting investors, a majority of

which were hedge funds, to invest in PIPE offerings; identifying and engaging issuers

believed to be likely candidates to raise capital through a PIPE; and acting as an

intermediary between issuers and investors, which included structuring offerings,

negotiating the terms of offerings, and drafting and distributing term sheets for

offerings.62

In exchange for its services, Ram received a percentage of the gross amount

invested by its clients as well as a percentage of any warrants that its clients received as

part of their investment. Ram‟s compensation was paid from the fees that Ram received

in connection with PIPEs.63

The SEC found that Ram acted as a broker without being

registered, in willful violation of Section 15(a) of the 1934 Act.

This settlement is unique in that the sole basis for the proceedings against Ram

appears to be the failure to register as a broker-dealer. Few, if any, enforcement

proceedings had been initiated by the SEC up until this point unless the failure to register

was accompanied by fraud or some other form of misconduct. This SEC order signals

increased attention by the commission with respect to “finders” and other unregistered

broker-dealers. The order also serves as a reminder for intermediaries not to assist

investors or issuers in PIPEs or other investment opportunities or take success-based fees

for providing these services without first being registered as a broker-dealer under the

1934 Act.

In another development, on May 17, 2010, the staff of the SEC denied BMW‟s

no-action request, thereby once again showing the staff‟s narrowed interpretation of the

finders‟ exemption from broker-dealer registration.64

BMW is a law firm engaged

principally in the general practice of law and does not engage in the practice of securities

law nor does it engage in any activities involving securities. BMW sought to assist a

renewable energy company in acquiring funding and subsequently asked the staff for no-

action relief. BMW‟s proposed arrangement provided that BMW would introduce

potential investors to the renewable energy company in exchange for a percentage of the

funds obtained from those investors. Under the proposed arrangement, BMW would not

(1) engage in any negotiations with investors, (2) provide potential investors any

information about the company that could be used as the basis for funding-related

negotiations, (3) be responsible for, or make any recommendations regarding, the terms,

conditions or provisions of any agreement for an investments, or (4) provide any

61

See RAM Capital Res. LLC, File No. 3-13524 (June 19, 2009), available at 2009 SEC Lexis 2035. 62

See id. 63

See id. 64

SEC No-Action Letter, 2010 WL 1976174 (May 17, 2010).

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assistance to any potential investor with respect to any transaction involving the financing

of the renewable energy company.65

In denying BMW‟s request, the staff of the SEC focused on two main points: (1)

the role BMW would have in introducing potential investors to the renewable energy

company and (2) the compensation scheme involved in the transaction.66

The staff stated

that the introduction of only those persons with a possible interest in investing in the

company implies that BMW anticipates both “pre-screening” potential investors to

determine their eligibility to purchase the securities, and “pre-selling” the company‟s

securities to gauge the investors‟ interest.67

Moreover, the staff was of the view that the

receipt of transaction-based compensation would give BMW a “salesman‟s stake” in the

proposed transactions and would create heightened incentive for BMW to engage in sales

efforts. Such activities require broker-dealer registration.68

Registration, the staff

explained, helps to ensure that persons who have a “salesman‟s stake” in a securities

transaction operate in a manner that is consistent with customer protection standards

governing broker-dealers and their associated persons.69

In sum, whether or not a finder will be deemed a broker-dealer and therefore

required to be registered under federal law involves a patchwork of considerations that, in

practice, offers rough guidance but may sometimes lead to inconsistent determinations.

This is largely a fact-driven exercise and appears to involve a considerable degree of

discretion. The same legal principles applied to the same set of facts at different times by

different judges or SEC examiners may accordingly produce different results.

II. Broker-Dealer Registration Requirements under New York State Law

A finder may also be subject to registration as a broker-dealer under a state‟s

blue-sky laws. Moreover, a finder exempted from the registration requirements under

federal law may nonetheless be required to register as a broker-dealer under a state‟s

blue-sky law if doing business in that jurisdiction, or vice versa. This is, for example, the

case under New York State law, where the licensing requirements for broker-dealers

doing business in New York do not exactly overlap the registration standards for broker-

dealers under federal law. Similarly, under California law the status of a finder as a

broker-dealer under federal law may not be conclusive. Unlike, for example, Florida,

California does not explicitly define a broker-dealer for purposes of its blue-sky law in

reference to federal law.70

Instead, the definition of a broker-dealer under California blue-

sky law includes not only parties directly engaged in effecting purchase and sale of

65

Id. 66

See id. 67

See id. 68

See id. 69

See Order Exempting the Federal Reserve Bank of New York, Maiden Lane LLC and the Maiden Lane

Commercial Mortgage Backed Securities Trust 2008-1 from Broker-Dealer Registration, (Apr. 9, 2010),

available at 2010 SEC Lexis 1085. 70

FLA. STAT. ANN. §678.1021 (West 2004) (Defining a broker for purposes of Florida blue-sky law as “a

person defined as a broker or dealer under the federal securities laws, but without excluding a bank acting

in that capacity.”)

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securities, but also parties that induce or even attempt to induce such securities

transactions. In some instances this may include persons who are mere finders under

federal law.71

Because of the potential heterogeneity of blue-sky law on this issue,

however, a finder and parties in a relationship with such finder are well advised to

examine the finder‟s status under the blue-sky law of the applicable jurisdiction for any

potential registration or licensing requirements.

A finder doing business in New York may or may not be required to register as a

broker-dealer under state law even if that finder is or is not deemed to be a broker-dealer

under federal law and therefore required to register as such with the SEC. New York‟s

Martin Act requires a registration statement to be filed with the attorney general of the

State of New York by brokers, dealers, and salesmen of securities.72

Under N.Y. Gen.

Bus. Law §359-e(3) (2004), “It shall be unlawful for any dealer, broker or salesman to

sell or offer for sale to or purchase or offer to purchase from the public within or from

this state, any securities issued or to be issued, unless and until such dealer, broker or

salesman shall have filed with the department of law a registration statement…”

Provisions are also made for alternative registration methods for persons conducting

multi-state securities offerings.73

The purpose of the Martin Act‟s registration by notice

requirement is to inform the attorney general and the state authorities of the stock

business carried on by brokers, dealers, and their sales staff and of the place where such

business is to be conducted.

N.Y. Gen. Bus. Law §359-e(1)(a) (2004) defines a “dealer” as “any person, firm,

association or corporation engaged in the business of buying and selling securities from

or to the public within or from this state for his or its own account, through a broker or

otherwise…” Gen. Bus. Law §359-e(1)(b) (2004) defines a “broker” as “any person,

firm, association or corporation, other than a dealer, engaged in the business of effecting

transactions in securities for the account of others within or from this state…” A

“salesman” is defined under Gen. Bus. Law §359-e(1)(c) (2004) as, “every person

employed by a broker or dealer as said terms are defined in this section, for the purpose

of representing such broker or dealer in the sale or purchase of securities to or from the

public within or from this state.”

These definitions of a “dealer” and a “broker” track, but do not completely

overlap, the definitions used under the 1934 Act. The courts in New York have not had

the opportunity to formulate tests as to what narrowly does or does not constitute a

“dealer” or a “broker” under New York law. Given the strong correspondence between

71

See CAL. CORP. CODE §25004 (West 2004); Lyons v. Stevenson, 65 Cal.App.3d 595, 605, 135 Cal.Rptr.

457, 463 (Cal. Ct. App. 1977) (“A person is not a broker [under California law]. . . where he merely brings

a buyer and a seller together so that „They may make their own contract without aid from him, but any

participation, however slight, in the negotiations will bring him within the definition.‟” (Internal citations

omitted.)) 72

See McKinney‟s Gen. Bus. Law §§ 352 et seq. (2004); Vacco v. World Interactive Gaming Corp., 185

Misc.2d 852, 863-864, 714 N.Y.S.2d 844, 854 (N.Y. Sup. Ct. 1999) (Foreign corporation and its wholly-

owned subsidiary acted as issuer, dealer and salesmen of securities, in violation of Martin Act, when they

sold units of corporation's stock from their office in New York without registering.) 73

See McKinney‟s Gen. Bus. Law §359-e(13) (2004); 13 NYCRR §§ 10.1 et seq. (2004).

- 15 -

the definitions of a “dealer” or a “broker” under the Martin Act and the federal statutes,

however, a presumption may arise that a person not a broker under federal law would

likewise not be a broker under the Martin Act. When there is a New York statute which is

based on, or closely parallels a federal statute, and there is little New York case law to

turn to for guidance, New York courts will look to the federal cases and apply principles

from those cases in construing the New York statute. In State v. Rachmani Corp., for

example, the New York Court of Appeals adopted the definition of “materiality” under

federal securities law, after noting that, “To be sure, the provisions of the [Martin Act and

the corresponding provisions of the federal securities laws] are not identical. But the

remedial purposes of the statutes are the same.”74

In Gardner v. Leftkowitz, a lower court

similarly noted that, “The Martin Act [New York State] and the Securities Acts of 1933

and 1934 [Federal] are virtually identical in their design and scope, and the purpose for

which they were enacted. Both are intended to be used in the prevention of the various

kinds of deceptive practices and fraudulent schemes which have developed side by side

with the growth of the securities industry.”75

The Martin Act has, on the other hand, been found to only apply to public

offerings. In People v. Michael Glenn Realty Corp., for example, the court held that,

“The [Martin] Act throughout refers to „public offerings‟ and although private offerings

are not explicitly exempt, on the familiar principle of „expressio unius est exclusio

alterius‟ the Martin Act is not intended to regulate private offerings.”76

Likewise, in

People v. Ruthven, the court noted that, “The gist of the offense defined by [N.Y. Gen.

Bus. Law §359-e] is selling „to the public.‟”77

Accordingly, a finder acting as an

intermediary in a private placement, or otherwise deemed not to be engaged in a “public

offering,” would not be required to register under the Martin Act, even if required to

register under federal law.

Four factors have been identified to determine whether potential investors need

the protection of the Martin Act: (1) the number of offerees (not just the number of actual

purchasers) and their relation to each other and to the issuer, (2) the number of units

offered, (3) the size of the offering, and (4) the manner of the offering.78

In Michael

Glenn Realty Corp., for example, the court applied these factors to determine that offer

relating to cooperative interests was a “private offering,” and that the failure to file a

prospectus with the New York Department of Law for the offering or to register as

broker-dealer under the Martin Act accordingly did not entitle the Attorney General of

the State of New York to obtain a preliminary injunction, where there were extensive

relationships and past dealings between offerees and issuers, the parties had been

neighbors and friends over a course of several years, there was a small number of

74

71 N.Y.2d 718, 726, 525 N.E.2d 704, 708 (N.Y. 1988); see also People v. Kaminsky, 127 Misc.2d 497,

501, 486 N.Y.S.2d 814, 820 (N.Y. Sup Ct. 1985) (Holding that federal case law concerning federal mail

fraud statute was reliable precedent for determining what constitutes a “scheme” within New York Penal

Law section establishing offense of scheme to defraud in the first degree, given the considerable

similarities between the applicable statutes) 75

97 Misc.2d 806, 812, 412 N.Y.S.2d 740, 746 (N.Y. Sup. Ct. Sp. Term 1978) (Brackets in the original). 76

106 Misc.2d 46, 48, 431 N.Y.S.2d 285, 287 (N.Y. Sup. Ct. Sp. Term 1980). 77

160 Misc. 112, 114, 288 N.Y.S. 631, 634 (N.Y. City Ct. 1936). 78

Michael Glenn Realty Corp., 106 Misc.2d at 49, 431 N.Y.S.2d at 287.

- 16 -

offerees, the offering was of limited size, and there was an absence of any advertising.79

On the other hand, in People v. Landes, the New York Court of Appeals held that,

“Offering of 200 shares in proposed corporation to be managed by defendant was „to the

public,‟ rather than personal sales of stock in private corporation, and therefore defendant

was required to register as dealer with State Department of Law; the 12 investors knew

little about defendant, the securities he was issuing or their fellow investors, stock was

issued on ad hoc basis to anyone who could be induced to buy whether they were

acquaintances or strangers and investors were not treated equally, some paying $500 a

share for their stock and others paying as much as $1,000 a few months later.”80

It should be noted that registration requirements ancillary to a jurisdiction‟s blue-

sky law may apply. This is particularly the case in the tax arena. For example, in addition

to the registration requirement of the Martin Act, New York Tax Law requires

registration of stock brokerages or anyone making or negotiating sales, agreements to

sell, deliveries, or transfers of shares or certificates taxable under Article 12 of the Tax

Law, which imposes a tax on transfers of stock and other corporate certificates.81

Every

organization which maintains a principal office or place of business within the state of

New York or which keeps or causes to be kept within the state of New York a place for

the sale, transfer, or delivery of its stock or other certificates is also required to register.82

Failure to register is treated as a misdemeanor.83

The stock transfer tax has been all but

repealed, in the sense that the tax is fully rebated to the taxpayer.84

However, the

registration requirements are still technically in place.

III. Failure to Register as a Broker-Dealer when Required to Do So

A. Consequences under Federal Law

The consequences of a finder‟s failure to register or obtain a license as a broker-

dealer, whether under state or federal law, can be severe. This is true for the finder, any

issuer placing any securities through that finder, the investors acquiring those securities,

and for any registered broker-dealer acting as intermediary to the transactions.

Failure to register as a broker-dealer under the 1934 Act when required to do so

triggers penalties that can be both civil and criminal. Section 32(a) of the 1934 Act

renders a willful violation of the Act, including its broker-dealer registration

requirements, an offense punishable by fines of up to $5,000,000, or prison terms of up to

20 years, or both, and, in the cases of a violator that is not a natural person, fines of up

$25,000,0000.85

79

Id.; see also Ruthven, 160 Misc. at 114, 288 N.Y.S. at 634 (Holding that President‟s sales of

corporation‟s stock without public advertising or general offering, to five stockholders to aid pending

litigation, was not “sales to the public,” within the meaning of N.Y. Gen. Bus. Law §359-e.) 80

84 N.Y.2d 655, 663, 645 N.E.2d 716, 719 (N.Y. 1994) 81

See McKinney‟s Tax Law §275-a (2004). 82

See id. 83

See id. 84

See McKinney‟s Tax Law §280-(a)(1) (2004). 85

15 U.S.C. §78ff(a) (2004).

- 17 -

However, the potentially devastating scope of these penalties is somewhat

tempered by the statutory availability of a “lack of knowledge” defense.86

Section 32(a)

provides that, “no person shall be subject to imprisonment under this section for the

violation of any rule or regulation if he proves that he had no knowledge of such rule or

regulation.”87

This defense, however, is by its terms not available to repeat violators and

does not restrict any monetary fines that may be incurred.

Under Section 21C of the 1934 Act, a person doing business as an unregistered broker-

dealer is also subject to SEC investigation and to the potential issuance of a “cease and

desist” order, which may provide for, among others, accounting and disgorgement.88

Moreover, under Section 21(d) of the Act, the SEC may sue for injunctive relief in

federal court and to obtain civil money penalties for any violation of the Act or of the

rules of any self-governing organization under the Act such as the FINRA (see below).89

In Pertinent part, Section 21(d)(1) provides –

(1) Whenever it shall appear to the Commission that any person is engaged or is

about to engage in acts or practices constituting a violation of any provision of

this chapter, the rules or regulations thereunder, [or] the rules of a national

securities exchange or registered securities association of which such person is a

member or a person associated with a member, ... it may in its discretion bring an

action in the proper district court of the United States ... to enjoin such acts or

practices.... 90

Subsection (2) in turn provides for civil money penalties and describes the procedure that

the SEC can use to collect them.91

Investors purchasing securities in a transaction intermediated by an unregistered

finder that should have been registered as a broker-dealer at the time may also move for

rescission. Section 29(b) of the 1934 Act can be used by an aggrieved investor to

invalidate any public or private offering arranged by a non-registered finder acting as a

broker-dealer.92

Section 29(b) provides that, “(e)very contract made in violation of any

provision of [the 1934 Act] ..., and every contract ... the performance of which involves

the violation of ... any provision of [the 1934 Act]..., shall be void ... as regards the rights

of any person who, in violation of any such provision ... shall have made or engaged in

the performance of any such contract ....”93

Indeed, in April 2008, the Supreme Court of

New York County in New York, enforced this very provision. In the suit, First

86

See id. 87

See id. 88

15 U.S.C. §78u-3 (2004). 89

See 15 U.S.C. §78u(d)(1), (2) (2004). 90

15 U.S.C. §78u(d)(1) (2004). 91

15 U.S.C. §78u(d)(2) (2004). 92

15 U.S.C. §78cc (2004). 93

15 U.S.C. §78cc(b) (2004); See generally Regional Properties Inc. v. Financial & Real Estate Consulting

Co., 678 F.2d 552 (5th Cir. 1982) (“[A] person can avoid a contract under section 29(b) if he can show that

(1) the contract involved a „prohibited transaction,‟ (2) he is in contractual privity with the defendant, and

(3) he is „in the class of persons the Act was designed to protect.‟”)

- 18 -

International Capital LLC, an affiliate of Torsiello Capital Partners LLC (“TCP”),

entered into an agreement with Sunshine State Holding Corp. (“Sunshine”) to provide

“financial advisory and investment banking services and to act as sole agent for the

private placement of Sunshine‟s securities.”94

Ultimately, the court held that such services fell under the SEC‟s definition of

brokerage services, thus holding TCP in violation of Section 29(b) of the Exchange Act,

rendering the agreement void and rescindable. Furthermore, TCP was found to have

misrepresented itself as a broker and was required to pay back a $50,000 retainer fee it

had previously received from Sunshine.

However, not every agreement in violation of the 1934 Act is automatically void;

it is only void at the discretion of the innocent party to the agreement, which is typically

the investor. In Mills v. Electric Auto-Lite Co., the Supreme Court stated, in dicta, that the

interests of the “innocent party” to a contract are protected by section 29(b)‟s language

“giving him the right to rescind.” 95 The Supreme Court further explained –

The language [of Section 29(b)] establishes that the guilty party is

precluded from enforcing the contract against an unwilling innocent party, but it

does not compel the conclusion that the contract is a nullity, creating no

enforceable rights even in a party innocent of the violation. The lower federal

courts have read 29(b) ... as rendering the contract merely voidable at the option

of the innocent party .... This interpretation is eminently sensible.96

Because an investor is unlikely to disavow a profitable investment, rescission can

have a devastating impact on issuers forced to buy back their potentially severely

depreciated securities at full original purchase value. The courts have specifically found

that Section 29(b) allows for rescission in the context of transactions intermediated by

unregistered broker-dealers, and have accordingly invalidated agreements and

transactions between and among issuers, investors and broker-dealers where the broker-

dealers have failed to register as such under federal law at the time investors were being

solicited or the agreements or transactions in question were being executed.97

Accordingly, the use of an unregistered finder acting as a broker-dealer under federal law

may force an issuer to unwittingly insure investors in its securities against any losses on

their investment.

B. Consequences under New York State Law

Failure to register or obtain a license as may be required by the laws of the

jurisdiction where the finder is doing business as a broker-dealer may also be punishable

as either a civil or criminal matter depending on the jurisdiction. A failure to register as a

94

See Torsiello Capital Partners LLC v. Sunshine State Holding Corp., 600397/06. Decided: April 1, 2008. 95

396 U.S. 375, 387, 90 S.Ct. 616, 623 (1970). 96

396 U.S. at 387, 90 S.Ct. at 623. 97

See e.g., Eastside Church of Christ v. National Plan, Inc., 391 F.2d 357 (5th

Cir. 1968); Regional

Properties Inc. v. Financial & Real Estate Consulting Co., 678 F.2d 552 (5th

Cir. 1982).

- 19 -

broker-dealer is normally treated as a misdemeanor. In appropriate circumstances,

however, more severe penalties may apply. Although there is contrary authority, failure

to register does not necessarily affect the validity of contracts or the right to recover

commissions otherwise payable.

Violations of the registration requirement under N.Y. Gen. Bus. Law §359-e can

give rise to criminal penalties. The Martin Act contains an omnibus provision relating to

the violation of any provision of the Martin Act, making the violation a misdemeanor

punishable by a fine of not more than $500, or imprisonment of not more than one year,

or both.98

A company failing to register “is normally penalized with a fine and

subsequently the company is often allowed to file for registration.”99

However, despite a presumptive treatment as a misdemeanor, a violation “still

constitutes a fraudulent practice under New York law” and can accordingly give rise to

felony penalties.100

In particular, under N.Y. Gen. Bus. Law §359-e(14), a failure to

register as required under §359-e “shall constitute a fraudulent practice as that term is

used” in the Martin Act. N.Y. Gen. Bus. Law §352-c sets forth the penalties for any such

“fraudulent practices.” Under §352-c(4), a fraudulent course of conduct under the Martin

Act is generally punishable as a misdemeanor. If the fraudulent conduct, however,

involves the distribution of securities to 10 or more persons or an aggregate value in

excess of $250,000, it is punishable as a class E felony.101

It should be noted that, in order to establish liability for “fraudulent practices” in

an enforcement proceeding under the Martin Act, as opposed to a proceeding under the

federal securities laws, the Attorney General of the State of New York does not need to

allege scienter or intentional fraud.102

Indeed, as used in N.Y. Gen. Bus. Law §352-c, the

terms “fraud” and “fraudulent practices” have been given a “wide meaning” by the

courts.103

In People v. Federated Radio Corp., the New York Court of Appeals noted that

the purpose of the Martin Act, including the registration provisions, is to “prevent all

kinds of fraud in connection with the sale of securities...”104

Accordingly, in view of the Martin Act‟s broad antifraud purposes, the

registration should not be regarded as a mere technical requirement, but as a substantive

requirement that, in appropriate instances, may lead, and has in fact led, to criminal

prosecutions. In State v. Stallings, for example, the First Department of the New York

Appellate Division explained that the purposes of the Martin Act “include not only the

prevention of fraud by means of filing requirements but the assurance of investigation

and appropriate civil or criminal proceedings when wrongdoing is found.”105

In People v.

Landes, the New York Court of Appeals accordingly upheld a criminal conviction for a

98

See McKinney‟s Gen. Bus. Law §359-g(2) (2004). 99

Vacco v. World Interactive Gaming Corp., 185 Misc.2d 852, 714 N.Y.S.2d 844 (N.Y. Sup. Ct. 1999). 100

Id. 101

See McKinney‟s Gen. Bus. Law §352-c(5) & (6) (2004). 102

See State of New York v. Rachmani Corp., 71 N.Y.2d 718, 726, 525 N.E.2d 704, 707-708 (N.Y. 1988). 103

Badem Buildings v. Abrams, 70 N.Y.2d 45, 54, 510 N.E.2d 319, 324 (N.Y. 1987). 104

244 N.Y. 33, 38, 154 N.E. 655, 657 (N.Y. 1926). 105

583 N.Y.S.2d 463, 463, 183 A.D.2d 574, 574 (N.Y. App. Div. 1st Dept. 1992).

- 20 -

failure to register as a dealer under the Martin Act, in light of otherwise fraudulent

conduct including misrepresentations about the issuer‟s business activities and the

misappropriation of investor‟s funds.106

A violation of the registration requirements under the Martin Act can also give

rise to an investigation by the New York State Attorney General and the issuance of an

injunction. The Attorney General may request restitution, penalties, and costs for any

fraudulent practices under the Martin Act.107

Violations of an injunction by the Attorney

General are treated as a misdemeanor in the first instance; repeat violations are, however,

treated as a Class E felony.108

Rescission is, however, not available as a remedy to private parties for a third

party‟s failure to register as a broker-dealer under the Martin Act. A failure to register

does not, moreover, affect the validity of contracts or revoke the obligation to pay

commissions. The Martin Act, unlike comparable statutes of some other states, does not

make sales void or voidable or unenforceable because a registration notice has not been

filed. A contract of purchase involving no fraud is valid and enforceable despite the

security dealer‟s failure to file. In Sajor v. Ampol, Inc., the New York Court of Appeals

explained that, “Our Legislature intended by the penal consequences to require all dealers

in securities to comply with the terms of the General Business Law so that the state might

have information whereby it could proceed either criminally or civilly. It did not intend to

make void or voidable any and every contract made with a corporation dealer, otherwise

valid, simply because it had failed to comply with the many administrative provisions of

this law.”109

As the Fourth Department of the New York Appellate Division further explains in

Sheridan v. Weber, “Nowhere does the Martin Act make a sale of securities void or

unenforceable, if the notice required by section 359-e has not been filed. The only penalty

provided for the nonobservance of any of the provisions of the act is to make the violator

guilty of a misdemeanor… The statute does not even prohibit fraudulent practices; it

merely provides a procedure to prevent them.”110

Thus, a stock salesman who has failed

to file notice is not thereby deprived of the right to recover commissions to which he or

she would otherwise be entitled. In Sheridan, the court held that the failure of a dealer in

securities to file the notice prescribed under N.Y. Gen. Bus. Law §359-e did not preclude

the dealer from recovering commissions for selling the stock in a corporation organized

by his employers, on the ground that the object of the Martin Act was to protect the

public from fraud and not to regulate contracts between a principal and its agent.111

106

84 N.Y.2d 655, 664, 645 N.E.2d 716, 720 (N.Y. 1994); see also Greenthal Co. v. Lefkowitz, 32 N.Y.2d

457, 463, 299 N.E.2d 657, 659 (N.Y. 1973). 107

See McKinney‟s Exec. Law §63 (2004); McKinney‟s Gen. Bus. Law §353 (2004) (“Upon a showing by

the attorney general that a fraudulent practice as defined by this article has occurred, he may include in an

action under this article an application to direct restitution of any moneys or property obtained directly or

indirectly by any such fraudulent practice.”) 108

See McKinney‟s Gen. Bus. Law §359-g (2004). 109

275 N.Y. 125, 131, 9 N.E.2d 803, 806 (N.Y. 1937). 110 252 A.D. 398, 401, 299 N.Y.S. 726, 731 (N.Y. App. Div. 4

th Dept. 1937).

111 Id.

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Moreover, the requirements for the registration of dealers who sell securities to

the public apply only to the vendor or the vendor‟s broker or agent, and will not preclude

the purchaser‟s broker or agent from recovering any commissions that may be due. In

Prince v. Scura, for example, the First Department of the New York Appellate Division

drew a distinction between sales of securities to third parties, and the purchase of

securities by an agent on behalf of its principal.112

The court held that the failure of a

broker employed to purchase securities to file a notice required by Gen. Bus. Law §359-e

prior to purchasing such securities was no defense to an action by the broker for his

commissions, inasmuch as there was no sale of securities by or through the broker to the

broker‟s employer.113

Similarly, a failure to register as a broker-dealer under New York

tax law should have no impact on a securities broker‟s ability to recover commissions

otherwise payable.114

It should be noted, however, that in other jurisdictions a contrary result may hold.

For example, courts in California, Idaho, and Texas have held that unlicensed entities and

individuals are not entitled to receive finder‟s fees unless properly registered.115

This is

also the prevailing rule in New York with respect to real estate brokers, and could

conceivably be extended to the unlicensed securities broker-dealer context despite the

authorities discussed above.116

C. Consequences under FINRA Rules and Regulations

FINRA rules and regulations generally prevent FINRA members from paying fees

to nonmember finders unless such finders are exempt, pursuant to an SEC staff

interpretation or otherwise, from the broker-dealer registration requirements under the

federal securities laws. Any registered broker-dealer paying fees to an unregistered

person in contravention to FINRA rules and regulations is subject to disciplinary

112

241 AD 387, 389, 272 NYS 362, 365 (N.Y. App. Div. 1st Dept. 1934).

113 See id.; see also Sajor, 275 N.Y. at 131, 9 N.E.2d at 806.

114 See Silinsky v. Lustig, 118 Misc 298, 299, 192 NYS 837, 838 (N.Y. City Ct. 1922) (Holding that the

failure of a stockbroker to register in compliance with Tax Law §275-a did not render a contract for

services illegal so as to prevent recovery of commissions or of advances made for the client.) 115

Rhode v Bartholomew, 94 Cal.App.2d 272, 282, 210 P.2d 768, 775 (Cal. Ct. App. 2nd

Dist. 1949) (“The

provision of the [California] Corporate Securities Act requiring a broker of stock to first secure a license

was designed to protect the public against unscrupulous operators. The efforts of respondent to sell the

stock, as shown by the uncontroverted evidence, were illegal and will not support a promise to pay therefor.

A contract employing a broker to sell corporate stock is void where the broker is not licensed to sell the

stock under the Corporate Securities Act, and the broker may not recover a commission.”); McKinlay v

Javan Mines Co., 248 P 473, 475-476, 42 Idaho 770 (Id. 1926) (Recovery for services in sale of corporate

stock could not be had in absence of showing of compliance with broker-dealer registration requirements

under Idaho Blue-Sky Law.); Flournoy v Gallagher, 189 S.W.2d 108, 111 (Tex. Civ. App. 1945) (“If a

person is engaged in the business and attempts to sell securities for himself or another he comes within the

Act and must meet the requirements of the law in obtaining a license. Any contract made in violation of the

Act is void and unenforceable.”) 116

Sorice v. DuBois, 25 A.D.2d 521, 521, 267 N.Y.S.2d 227, 228 (N.Y. App. Div. 1st Dept. 1966) (“We

hold that the transaction here involved is a sale of real estate, and since the plaintiff is not properly licensed

he may not recover either brokerage commissions or finder‟s fees.”)

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sanctions pursuant to FINRA Rule 8310.117

Although there are no FINRA rules that expressly prohibit the payment of finder

or referral fees by FINRA members to unregistered individuals or entities, the FINRA has

“consistently” taken the position that such payments would be improper, unless the

recipient is registered as the associated person of a member, is registered as the

associated person of another member which has given permission for the payment of the

finder, or is not required to be registered with the SEC as a broker-dealer pursuant to an

SEC no-action letter.118

This position is based on the reasoning that an introduction or a referral made in

connection with a brokerage transaction, even where the intermediary does not

recommend or mention any specific securities or the qualifications of the member, is a

solicitation by the intermediary of the prospective customer. The FINRA expressly

maintains that “persons who introduce or refer prospective customers and receive

compensation for such activities are engaged in the securities business for the member in

the form of solicitation. Solicitation is the first step in the consummation of a securities

transaction and must be regarded as part of the conduct of business in securities.”119

Anyone who engages in such solicitation, whether or not technically in the capacity as an

employee of an FINRA member, thereby falls within the definition of a “representative”

of that member as set forth under FINRA Rule 1031(b), which specifically includes under

that definition, “[A person] associated with a member ... who [is] engaged in the

investment banking or securities business for the member including the functions of

supervision, solicitation or conduct of business in securities.” The FINRA has explained

that, although, “on an informal basis, [the FINRA] has permitted „one-time‟ fees not tied

to the completion of a transaction or the opening of an account, it has consistently taken

the position that the activities of locating, introducing, or referring potential retail

customers come within the definition of representative and that persons who receive

compensation for performing such activities are acting on behalf of the member and

should be registered with the firm.”120

Under FINRA Rule 1031(a), all representatives of FINRA members must be

registered as such with the FINRA. In light of this rule, the FINRA has announced that,

“FINRA Regulation believes that persons who receive compensation from a member for

soliciting securities transactions are engaged in the securities business under the control

of a member firm and should be subject to FINRA qualification and registration

117

This rule provides for “Sanctions for Violations of the Rules,” including a potential fine, censure,

suspension or expulsion from the FINRA, and the imposition of a cease and desist order. See FINRA Rule

2420(b)(2) (2004), available at http://FINRA.complinet.com/FINRA/display/index.html (last visited March

3, 2006). 118

See FINRA Notice to Members 97-11, available at

http://FINRA.complinet.com/FINRA/display/index.html (last visited March 3, 2006); FINRA Notice to

Members 89-3, available at http://FINRA.complinet.com/FINRA/ display/index.html (last visited March 3,

2006). 119

See id. 120

FINRA Notice to Members 97-11, available at http://FINRA.complinet.com/FINRA/display/index.html

(last visited March 3, 2006).

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requirements.”121

The FINRA has also cautioned that the use of unregistered finders may result in a

potential breach of FINRA Rule 2420, which generally prohibits members from granting

selling concessions or fees to nonmember broker-dealers. For example, under FINRA

Rule 2710 (the “Corporate Financing Rule”) a broker-dealer may pay finder‟s fees to a

nonmember third party for the referral of issuers that are potential corporate finance

clients. Any such payment would, however, generally be improper unless the third party

is not required to be registered as a broker-dealer pursuant to SEC staff positions.122

Otherwise, such payments may violate the restrictions under FINRA Rule 2420 against

commission-split sharing arrangements.

FINRA rules and regulations generally limit the extent to which a registered

broker-dealer can share profits with a nonmember broker-dealer. FINRA Rule 2420

requires an FINRA member to deal with nonmembers only at the same prices, for the

same commissions or fees, and on the same terms and conditions as are accorded by such

FINRA member to members of the general public. In particular, no member shall “in any

transaction with any non-member broker or dealer, allow or grant to such non-member

broker or dealer any selling concession, discount or other allowance allowed by such

member to a member of a registered securities association and not allowed to a member

of the general public.”123

Similarly, nonmembers are not allowed to participate with

members in syndicate groups in the distribution of securities.124

Furthermore, no member

shall “sell any security to or buy any security from any non-member broker or dealer

except at the same price at which at the time of such transaction such member would buy

or sell such security, as the case may be, from or to a person who is a member of the

general public not engaged in the investment banking or securities business.”125

Accordingly, a registered broker-dealer may not compensate an unregistered

broker-dealer acting as a finder on the basis of the dollar value of any securities

transaction resulting from the finder‟s efforts, and may only compensate a finder, if at all,

on flat fee basis. Such a finder may not in any way serve as an intermediary to the

brokerage transaction or receive commissions or apply mark-ups. Such finder may also

not directly participate with an FINRA member in the active distribution of securities.

The FINRA has moreover explicitly stated that the following situations create a

presumption that a finder should be registered, and that any referral agreements between

an FINRA member and such unregistered finder may therefore be improper:

121 Id. 122

See Letter from Mary N. Revell of the FINRA to Daniel Schloendorn, Willkie Farr & Gallagher (June

18, 1998), available at http://FINRA.complinet.com/FINRA/display/index.html (last visited March 3,

2006). 123

FINRA Rule 2420(b)(1) (2004), available at available at http://www.FINRAr.com/2910/2210_04.htm

(last visited March 3, 2006). 124

See FINRA Rule 2420(b)(2) (2004), available at available at

http://www.FINRAr.com/2910/2210_04.htm (last visited March 3, 2006). 125

FINRA Rule 2420(b)(1) (2004), available at available at http://www.FINRAr.com/2910/2210_04.htm

(last visited March 3, 2006).

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1. The finder repeatedly refers prospective customers to the member;

2. The finder makes a sales pitch or a recommendation concerning the investment

purchased; or

3. Direct transaction-based compensation is paid to the finder.126

FINRA rules and regulations also provide for restrictions on business

arrangements with nonmembers depending on the type of activity undertaken. For

example, according to FINRA IM-2420-1(d)(6), an FINRA member “may not pay a

commission to any non-member broker or dealer for executing a brokerage order [on its

behalf] in the over-the-counter market.” According to FINRA Rule 2810(b)(4)(B)(iv),

commissions or other compensation to “finders” who are not registered as broker-dealers

for inducing the finder to advise a purchaser to purchase interests in a direct participation

program (i.e., “limited partnership interests” under Regulation D) is explicitly prohibited.

Finally, the FINRA has made a by now long-standing proposal (originally proposed in

1989, but still under consideration) to enact a rule that would explicitly restrict the

payment of finders‟ fees by FINRA members to unregistered third parties for the referral

of retail business.127

In addition, the FINRA has brought a number of regulatory actions under FINRA

Rule 3040 against associated persons of FINRA-member firms for their “selling away”

activities as independent, unregistered finders.128

IV. Looking to the Future – The American Bar Association’s Task Force on

Private Placement Broker-Dealers

On June 20, 2005, a Task Force of representatives from the Business Law Section

of the American Bar Association issued a report and recommendations regarding

unregistered finders.129

The Task Force recommends creating a simplified “limited

purpose private placement broker-dealer” (“PPBD”) registration category that would

facilitate finders‟ registration and bring unregistered finders into the regulatory

sheepfold.130

The Task Force suggests that the PPBD category would improve business

capital formation opportunities for small businesses, which frequently have limited

access to established capital markets.131

The Task Force recommends that eligibility for registration under this new

126

FINRA Notice to Members 97-11, available at h available at

http://www.FINRAr.com/2910/2210_04.htm (last visited March 3, 2006). 127

FINRA Notice to Members 89-3 (proposing new FINRA Rule 2460), available at

http://www.FINRAr.com/2910/2210_04.htm (last visited March 3, 2006). 128

See In re Gilbert M. Hair, 51 SEC LEXIS 374, 378 (1993); In the Application of John E. Goldsworthy,

2002 SEC LEXIS 2907 (Nov. 15, 2002). 129

The Report is available at http://www.allbusiness.com/periodicals/article/499110-1.html (last visited

March 3, 2006). 130

See id. 131

See id.

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category should be available to principals or their firms meeting certain minimum

criteria, including:

* No participation in public offerings registered pursuant to the Securities Act of

1933, but with the ability to receive referral fees for introducing such offerings to

full service broker-dealers.

* No statutory disqualifications of the firm or its principals.

* Offerings by PPBDs could be made only to accredited investors and qualified

purchasers based on how the SEC defines the term. Issuers, however, could

separately offer to any investor qualified by the type of exemption.

* The firm may not handle or take possession of funds or securities. * All offerings would be done on a best efforts basis.

* All funds from offerings will be placed in escrow in an unaffiliated financial

institution and in accordance with escrow requirements in SEC Rule 15c2-4.

* The firm must not engage in secondary market or trading activity, including

assisting with maintenance of “desk drawer” markets at the issuer or the broker-

dealer.

* Principals and representatives shall have successfully completed FINRA

examinations appropriate to the scope of activities of the PPBD.132

The Task Force recommends adopting modified FINRA rules regarding, among

others, record-keeping and reporting, net capital, testing, and continuing education, that

conform and are consistent with PPBDs‟ more limited broker-dealer activities.133

In

addition, the Task Force recommends that a PPBD be required to file an annual

“Statement of Activity” summarizing the transactions in which it has participated during

the past calendar year, and which provides sufficient statistical information to determine

regulatory effectiveness or to conduct appropriate inspections.134

The Task Force‟s recommendations have been endorsed by the SEC‟s

Government-Business Forum, but have not yet been formally adopted.135

However, while

the SEC seemingly dragged its feet on this issue for a few years, it has once again gained

steam and become a priority to clarify the regulatory and legal grey areas that house

“finders.” During the 2008 Annual SEC Government-Business Forum on Small Business

Capital Formation, Chairman Chistopher Cox, speaking on behalf of the “Private

Placement and M&A Broker-Dealer Breakout Group,” urged the commission to implement

the following:

“1. U.S. small business owners are poised to transfer an estimated $10 trillion worth

of business assets in preparation for their retirements. To facilitate these transfers

and to assist small business owners in continuing their leading role in job creation,

exports, and technology innovation, we implore the Commission to implement the

recommendation of its own Advisory Committee on Smaller Public Companies3

and

adopt rules as recommended by the American Bar Association in its “Report and

132

Id. 133

See id. 134

See id. 135

See Final Report, 24th

Annual SEC Government-Business Forum on Capital Formation (Nov. 2005), at

p. 15, available at http://www.sec.gov/info/smallbus/gbfor24.pdf (last visited March 3, 2006).

- 26 -

Recommendations of the Task Force on Private Placement Broker-Dealers,” dated

June 20, 2005.

2. Allow “private placement brokers” to raise capital through private placements of

Issuers’ securities with one or more “accredited investors” in amounts per issuer of

up to 10 percent of the investor’s net worth (excluding his or her primary residence),

with full written disclosure of the broker’s compensation, and in aggregate amounts

of up to $20 million per issuer, periodically adjusted for inflation.

3. Provide an exemption from the definitions of “broker” and “dealer” for

“finders”; recommend to FINRA the adoption of a rule to permit broker-dealer fee-

sharing with finders; and coordinate the implementation of these actions with the

states.”136

In 2009, Mary Schapiro succeeded Chairman Christopher Cox to lead the

Commission. Certainly, because of the transition of a new Chairman and many issues

plaguing the economy, one can understand that why the Commission has yet to act

definitively. 137

However, PPBD regulation remains a priority and was again slated for

discussion on the agenda of the 2009 Government-Business Forum on Small Business

Capital Formation.138

Notwithstanding the hesitance to adopt a Private Placement Broker Dealer

registration, on April 13, 2009, the commission approved, the FINRA proposed, NASD

rule 1032(i). This rule, seemingly FINRA‟s response to the use of “finders,” creates a

“limited representative category –Limited Representative – Investment Banking – for

persons whose activities are limited to investment banking and principals who supervise

such persons.” 139

In particular, the registration category includes those associated

persons whose activities involve:

“(1) advising on or facilitating debt or equity securities offerings through a

private placement or a public offering, including but not limited to origination,

underwriting, marketing, structuring, syndication, and pricing of such securities and

managing the allocation and stabilization activities of such offerings, or

(2) advising on or facilitating mergers and acquisitions, tender offers, financial

restructurings, asset sales, divestitures or other corporate reorganizations or business

combination transactions, including but not limited to rendering a fairness, solvency or

136

See Final Report, 27th

Annual SEC Government- Business Forum on Small Business Capital Formation.

Nov. 2008, at 17, available at http://www.sec.gov/info/smallbus/sbforum.shtml (last visited April 26, 2010) 137

Available at http://privateplacementbroker.com/ 138

See Final Report, 27th

Annual SEC Government- Business Forum on Small Business Capital Formation.

Nov. 2008, at 17, available at http://www.sec.gov/info/smallbus/sbforum.shtml (last visited April 26, 2010)

139 Based upon instruction from the Commission staff, FINRA is submitting SRFINRA-

2009-049 for immediate effectiveness pursuant to Section 19(b)(3)(A) of

the Act and Rule 19b-4(f)(6) thereunder, and is not filing the question bank for

Commission review available at,

http://www.finra.org/web/groups/industry/@ip/@reg/@rulfil/documents/rulefilings/p119459.pdf

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similar opinion.”140

Because FINRA is authorized to prescribe standards of training, experience, and

competence for persons associated with FINRA members, it created The Series 79 exam

in conjunction with NASD rule 1032(i) in order to ensure that persons associated with

FINRA members seeking to register as investment banking representatives have attained

specified levels of competence and knowledge. 141

Rule 1032(i) went effective in

November 2009, and individuals who are registered as a General Securities

Representative and function in a member‟s investment banking business line as described

in Rule 1032(i), or act as principals supervising such persons, prior to May, 2010, may

opt in to the Limited Representative-Investment Banking registration category.

After May, 2010, individuals who perform the job functions set out in Rule

1032(i) will be required to pass the Series 79 exam instead of the General Securities

Representative (“Series 7”) exam (or equivalent exams), unless subject to any exceptions

listed within the Rule.(put citation) “Any person whose activities go beyond those

specified in Rule 1032(i) will be required to separately qualify and register in the

appropriate category or categories of registration attendant to such activities. The

registration category does not cover individuals whose investment banking work is 15

U.S.C. 78o-3(g)(3)(B). limited to public (municipal) finance or direct participation

programs as defined in NASD Rule 1022(e)(2).”142

Furthermore, individuals who are currently registered as a Limited Representative

– Private Securities Offerings may continue to function in such capacity, as long their

investment banking activities are restricted to effecting private securities offerings as

defined in NASD Rule 1032(h)(1)(A).143

Similarly, individuals who in the future wish to

engage in such investment banking activities that are limited to effecting only private

securities offerings may opt to register as a Limited Representative – Private Securities

Offerings and pass the corresponding Series 82 exam in lieu of the Series 79 exam.

The qualification exam consists of 175 multiple-choice questions Candidates will

be allowed 300 minutes to complete the exam. FINRA has prepared a content outline in

order to assist member firms in transitioning and preparing candidates for the Investment

Banking Professional Qualification Examination. “The content outline describes the

following four topical sections comprising the examination: (1) Collection, Analysis and

Evaluation of Data (75 questions); (2) Underwriting/New Financing Transactions, Types

of Offerings and Registration of Securities (43 questions); (3) Mergers and Acquisitions,

Tender Offers and Financial Restructuring Transactions (34 questions); and (4) General

Securities Industry Regulations (23 questions).” 144

Candidates will be given a detailed

informational breakdown of their performance on each section, along with their overall

score and pass/fail status at the completion of the exam session.

140

See id. 141

See id 142

See id. 143

See id. 144

See Id.

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Conclusion

The use of unregistered finders is a widespread practice in the securities industry.

Such finders may properly engage in securities-related activities of a limited scope

without being required to register. Unfortunately, the guidance available from the courts,

the SEC, and the FINRA does not set forth clear guidelines as to the circumstances that

would require a finder to register as a broker-dealer. A number of factors likely to impact

that determination have been identified, and are discussed above. In general, any

involvement by a finder beyond a merely introductory role may subject that finder to

registration requirements under both federal and blue-sky law. Failure to register by a

finder required to register may give rise to penalties, whether civil or criminal, for all

parties concerned under federal law and, depending on the jurisdiction, under blue-sky

law as well. Of particular concern, is that a unsatisfied investor may invoke a finder‟s

failure to register as required by law to unravel an offering and obtain rescission over

potentially highly depreciated securities. In addition, a registered broker-dealer relying on

the services of an unregistered finder may be subject to FINRA sanctions for sharing

profits with a non-FINRA member.