What Is an Unregistered Finder?

As a small business owner, facing the challenge of connecting with investors to raise capital for growth and expansion is common. You might find yourself in a situation where the amount you’re seeking is too low to attract venture capital funds, yet exceeds what you can gather from family, friends, and personal financing.

For established, large-scale businesses, a common solution is to partner with a broker-dealer registered with the SEC. However, finding registered broker-dealers willing to handle smaller transactions can be tough. In light of this, many business owners opt for unregistered finders. This choice, though, comes with its own set of compliance and regulatory risks. This article will guide you through what unregistered finders are, when they must or must not register with the SEC, and how to proceed with caution if you’re considering engaging with one.

Defining an Unregistered Finder

An unregistered finder—often called a ‘finder’—serves as a bridge between companies looking for potential investors, without being registered with regulatory authorities like the Securities and Exchange Commission (SEC). Unlike their registered counterparts, who must navigate through the regulatory and compliance demands of the Exchange Act, unregistered finders work within a more relaxed framework.

However, this ease comes with considerable risks. If these finders fall short of meeting the necessary regulatory standards, your business could face serious consequences. These risks include the potential for investors to withdraw from deals brokered by the finder and the possibility of the SEC initiating aiding and abetting liability actions against your company.

When Finders Are Considered Unregistered Broker-Dealers

Both the SEC and federal law require registration as a broker-dealer for finders under one or more of the following conditions:

  • If they significantly engage in the transaction, including soliciting or negotiating with investors;
  • If their compensation is contingent on the transaction's success;
  • If they have a track record of conducting or facilitating securities transactions;
  • If they contribute to structuring the transactions;
  • If they provide advice regarding the sale of securities;
  • If they are involved in soliciting new clients; or
  • If they distribute securities quotes or other pricing information.

It’s important to note that although no single factor definitively classifies a finder as a broker-dealer, the SEC has highlighted in its numerous No-Action letters that how a finder is compensated plays a pivotal role in this determination.

Conclusion: Proceed With Caution

What does all this mean for you and your business? If you’re considering working with a finder, it’s crucial to ensure they are either registered with the SEC and compliant with state securities laws or not considered an unregistered broker-dealer by the SEC and other regulatory authorities.

A practical first step is verifying a finder’s registration status by checking the broker-dealer list on FINRA. Should the finder be unregistered, consulting an attorney becomes essential. A lawyer can guide you in determining whether the finder needs to be registered and highlight the risks of engaging them without proper registration. This step ensures your business navigates the regulatory landscape safely and remains compliant.

Are you wondering about any of the issues mentioned above? Please email us at info@wilkinsonlawllc.com or call (732) 410-7595 for assistance.

At Wilkinson Law, we give business owners the documents and advice they desperately need to fund, grow, protect, and sell their businesses. We are trustworthy business advisors keeping your business on TRACK: Trustworthy, Reliable, Available, Caring, Knowledgeable.®