Finders, Form D, and the Quiet Failures

The Finder Problem

A company needs capital. Someone offers to introduce investors in exchange for a percentage of whatever closes. It feels like a referral fee. It feels like how business is done.

It is very likely unregistered broker activity.

Under the Exchange Act, a person who is in the business of effecting securities transactions for others generally must be registered as a broker-dealer. Transaction-based compensation, meaning payment that depends on whether and how much money is raised, is one of the strongest indicators of broker activity. A finder who solicits investors, discusses the merits of the investment, handles negotiations, or is paid a success fee is at serious risk of acting as an unregistered broker.

The exposure is not limited to the finder. The issuer that pays an unregistered broker can face regulatory consequences, and investors who came in through that person may have grounds to seek rescission. In a later financing or going-public transaction, due diligence will ask how every prior investor was found and how anyone who helped was paid. The answer matters.

The safer course is to use a registered broker-dealer for placement work, or to structure any introducer relationship so that it does not involve solicitation or transaction-based pay. This is an area where facts matter and the lines are not always bright, which is exactly why the question should be asked before the engagement letter is signed.

Form D

A company relying on Regulation D must file a notice on Form D with the SEC within fifteen days after the first sale of securities in the offering. The date of first sale is generally the date the first investor is irrevocably contractually committed to invest. Amendments are required in certain circumstances, including annually for continuing offerings and when certain information changes.

Form D is a short form. Failing to file it does not by itself destroy the federal exemption under Rule 506. But it is a marker. It is also a condition to certain state notice filings, and it is one of the first things a later diligence reviewer, regulator, or acquirer will check. Markers accumulate.

Blue Sky Notice Filings

Securities offered under Rule 506 are "covered securities" for purposes of state law, which means states cannot require registration of the offering itself. States can, however, require notice filings and fees, and most do. Those filings are typically due within a short time after the first sale in that state. Missing them is another quiet failure that becomes visible later.

Integration

A company that conducts more than one offering in a short period must consider whether the offerings should be treated as one. If a private offering is integrated with a public offering, or with another private offering conducted under a different exemption, the exemption for one or both may be lost. The SEC's integration framework provides safe harbors and principles for analyzing this, but it requires analysis. It should not be assumed away.

Stock Issued for Services

Smaller companies often pay consultants, advisors, and vendors in stock. Each of those issuances is an issuance of securities that needs an exemption, proper documentation, board approval, and accurate accounting. Shares issued to consultants for capital-raising or promotional services raise additional concerns. When I review a company's capitalization history, stock issued for services is often where the gaps are.

The Record That Protects You

The common thread is documentation. For every issuance, the company should be able to show what was issued, to whom, for what consideration, under what exemption, with what board approval, and with what disclosure. That record will be requested, sooner or later, by an auditor, a transfer agent, a market maker, an acquirer, or a regulator. It is far easier to build it as you go than to reconstruct it years later.