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What You Need to Know About Finders, Agents & Brokers



If
you are looking for a public shell or blank check company to go public via a reverse takeover, or are looking to raise capital chances are you have come across finders, agents or brokers in your quest. Some may have actually come looking for you to offer their services. It has been our experience that many of you will enter into negotiations with one these individuals prior to talking to legal counsel. Of course, we think that is a bad idea. You are probably going to do it anyway and as such we want you to know a few basic things about finders, agents and brokers. It goes without saying, but we will say it anyway, do not sign anything without talking to legal counsel first. It is also important to remember that the securities laws of each jurisdiction involved in a transaction must be complied with by the parties involved.

Finders

Finders are individuals who introduce two or more parties they believe have a mutual interest and who subsequently allow those parties to work out a transaction between themselves. A finder may be compensated for his or her introductory services, but they may need to be licensed under State and Provincial securities laws in which her or she resides, the  investors resides, or the target company resides. If a finder does more than say "there is an investor/company" and instead sells or acts as the go-between person in a securities transaction they are likely in violation of applicable securities laws by acting as an unregistered broker-dealer.

Finders frequently act as a broker-dealer without being properly licensed in the US or Canada. A finder is considered to be acting as a broker-dealer when they effect or attempt to effect a transaction in securities. In other words they are doing more than just introducing the parties. Under certain US State securities laws merely finding or offering a shell or blank check company or finding purchasers in a securities offering for compensation is enough to require an individual to be licensed as an agent or broker-dealer. Even if no compensation is involved, US Federal securities law may require an individual to be licensed as a broker-dealer in certain circumstances.

The US Securities and Exchange Commission ("SEC") has fined and sanctioned several individuals who offered shell and blank companies for sale. Messrs. Morris, Fearnow, Longman, Golub, Kading, and Millkon and their companies are a few of the finderís the SEC has sanctioned for acting as finder. It is clear from these cases that the SEC will consider a finder to be acting as a broker-dealer required to be registered if the finder is doing any of the following:

  • active solicitation of buyers and/or sellers online, through newspapers and fax programs,
  • vetting the buyer or sellerís suitability,
  • relaying information back and forth between the parties,
  • negotiating or mediating between the parties,
  • offering advice or suggestions as to the terms or structure of the reverse merger,
  • offering advice as to restructuring the corporation or advise about the post merger entity in general,
  • preparing any of the reverse merger documentation,
  • calculating the value of the merger,
  • making arrangements for the first market maker,
  • generally acting as an intermediary of the sale.
  • Given that the fines imposed by the SEC were minor in these cases many of these individuals and others continue to act as a finder without being licensed or registered as a broker dealer contrary to US securities laws.

    The securities laws in Canada concerning finders varies province to province. In British Columbia, our securities laws recognize finderís have a legitimate and often necessary role in certain transactions as long as the finder limits his or her role to just introducing the parties. There are restrictions in British Columbia as to the form of compensation a finder may receive. Specifically, only companies who are reporting companies in British Columbia may issue stock to finders as compensation for their services . A number of OTC Bulletin Board companies have applied for an exemption order from the British Columbia Securities Commission to issue stock to finders in BC. PC Support.Com, Inc. is one example of an OTCBB company which applied for and received an exemption order to issue stock as a finderís fee to Wolverton Securities.

    Agents

    Agents are individuals who represent a specific issuer or broker-dealers in effecting or attempting to effect a securities transaction. In the US an agent must be licensed as an agent of the issuer under applicable State securities laws before receiving compensation for selling securities for that issuer in that State This applies whether the transaction is a public or private securities transaction. This rule also applies to officers, directors and employees of an issuer. Some States provide an exemption from licensing as an agent if the securities of the issuer are being sold to accredited investors as defined by that State.




    Officers, directors and employees of an issuer who receive compensation for selling securities of that issuer for compensation must register as an agent for the issuer in each State in which he or she intends to solicit investors. Officers, directors and employees are often not required to be licensed as an agent if they are not paid extra compensation for acting in this capacity. However, in the event an officer, director or an employee, even without extra compensation, raises funds more than once in a twelve month period, there is a Federal prohibition against further activity without being licensed. (Exchange Act Rule 3a4-1)

    In British Columbia we also use the term "advisor".  Anyone offering an opinion about the investment merits of or recommending the purchase or sale of securities, or holds himself or herself out as engaging in the business of advising is an adviser and must be registered or exempt from registration. Registration as an advisor is not required if all that is being provided is factual information about an issuer and as long as it is not accompanied by a recommendation regarding or an opinion about the merits of the issuer's securities.

    Where finders usually cross the line again is in doing something more than just make an introduction. Finders who offer an opinion about the merits of an investment or acquisition of a particular target company are acting as an agent or an advisor and needs to be registered.

    Attorneys and accountants who refer or identify potential investors or acquisition candidates (ie. a shell company) while performing other valuable services and without receiving special compensation for this referral or identification service are exempt from licensing as an agent or advisor.  Most securities attorneys source shell companies for their clients and often bypass finders altogether in the process.

    Brokers

    Brokers or registered representatives, acting under the license of a broker-dealer, may sell securities within the State or Province they are registered. In the US and Canada a broker can sell securities in a private securities transaction if they follow certain rules.

    In the US, NASD approval under the NASD Rules of Fair Practice is not required if the transaction is private. Brokers are required, however, to obtain written approval from their broker-dealers before participating in any manner in a private securities transaction. This approval is hard to obtain as the broker-dealer is obligated under securities laws to supervise the activities of its employees even in the context of a private placement or other transaction. It does not matter if their role is limited to client introduction or whether or not they receive a finderís fee or referral fee.

    The securities rules in Canada in this area are almost identical to the rules in the US.  In British Columbia, brokers and registered representatives must receive written approval by their broker-dealer before participating in any private securities transactions. The trades must be recorded in the books and records of that broker-dealer (no off-book transactions), and must be made under the supervision of that broker-dealer. The broker-dealer again may be held accountable for the activities of the broker or registered representatives selling these securities and as a result are unlikely to give its approval to these types of transactions.

    Many broker-dealers impose additional house rules on the brokers and other employees in their organization. These rules apply not only in the case of private placement of securities, but also apply in the introduction and resulting sale of a shell or target company.

    This has been a quick overview of some of the things you should know about finders, agents and brokers. The information provided is general in nature and you should discuss your specific situation and concerns with your legal counsel.



    Alixe B. Cormick
    Venture Law Corporation

    618 - 688 West Hastings Street
    Vancouver, B.C.
    V6B 1P1
    Phone: 604-659-9188
    Fax: 604-659-9178
    E-mail Us

     
         

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