As of the first of this year, California Corporations Code section 25206.1 permits unregistered persons to receive finder’s fees from the sale of securities provided that:
- The finder is a natural person;
- The transaction is a sale of securities of the issuer in an issuer transaction in California; and
- The transaction or series of transactions does exceed $15 million in the aggregate.
Under the law the finder cannot:
- Participate in negotiations regarding the terms of the transaction;
- Advise any party on the value of the securities and whether or not to invest;
- Conduct any due diligence for any party to the transaction;
- Sell any securities the finder owns, either directly or indirectly;
- Be in possession of any of the funds involved in the transaction;
- Participate in the transaction unless the finder is qualified by permit or is exempt from qualification under California law; and
- Disclose to a buyer anything other than the contact information for the issuer; the name, type, price and aggregate amount of the securities offered; and the issuer’s industry, location and number of years in business.
In order to receive a finder’s fee the Corporation Code requires the finder to file a statement of information with his or her name and address with the California Bureau of Business Oversight and pay a $300 filing fee and, every year thereafter,
file annual renewal statements and pay a $275 renewal fee.
To qualify for the exception requiring registration, the finder must procure a written agreement signed by the issuer, the finder and the party introduced by the finder that discloses:
- The type and amount of compensation being paid to the finder;
- That the finder is not providing advice to any party to the transaction as to the value of the securities or the prudence of buying or selling them;
- Whether the finder owns any of the securities being sold;
- Whether any conflict of interest exists for the finder;
- The right of the parties to pursue any available remedies for breach of the agreement; and
- Representation by the investor that he or she is an “accredited investor” as defined by SEC Regulation D and agrees to the payment of the finder’s fee.
The finder is also required to keep copies of the notice, written agreement and all records relating to the transaction for five years.
Although California law will permit the payment of finder’s fees for transactions that involve California issuers, sellers and buyers of securities in California, any transaction conducted outside the state will still be subject to federal law. Since the SEC’s current policy prohibits the payment of finder’s fees for securities transactions, violating this policy could result in penalties and other disciplinary actions.
The new law may be a boon to small California privately held corporations who wish to issue and sell stock and bonds. It is anticipated that an entirely new class of securities investor finders will find safe harbor in the sale of California small
business securities to Californians.
However, before you go into this fledgling business or arrange to pay finder’s fees for the sale of your California company’s securities to California investors, consult with your legal counsel so you do not run afoul of SEC regulations.
The information presented is not intended to be, and does not constitute, “legal advice.” Because each situation varies, and only brief summary information is provided here, you should not use this information as a basis for action unless you have independently verified with your own counsel that it applies to your particular situation.
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