Good for raising capital in California, but contrary to current SEC policy for transactions outside California
On October 10, 2015, the Governor of the State of California approved California Assembly Bill 667, which will legalize the payment of finder’s fees by an issuer of securities to a person who introduces one or more accredited investors who purchase securities of the issuer and who complies with the requirements of new Section 25206.1 of the California Corporations Code, as described below. This new law will take effect on January 1, 2016, and will create a fundamental change in California securities law. However, it will also create a conflict between California law and the current policy of the Securities and Exchange Commission (“SEC”), which considers payments of finder’s fees to persons not registered as securities broker-dealers as violations of Section 15(a) of the Securities Exchange Act of 1934 (“Exchange Act”).
The new California law recognizes the widespread practice of payment of finder’s fees to unregistered persons and acknowledges the need to legalize this practice to promote capital formation in small business.
The new California law was proposed by the Business Law Section of the California State Bar in 2012, for the purpose of legalizing what the Business Law Section acknowledged was already a widespread practice of payment of finder’s fees by businesses seeking to raise capital, both in California and nationwide. In recommending the change in California law, the proposal commented that percentage-based compensation is often the only type of compensation that an issuer can afford to pay to a finder. The proposal noted that the penalties for payment of finder’s fees to unregistered persons included rescission of sales of securities, which potentially harmed both issuers and investors in companies which raised capital using unregistered finders. The proposal concluded that legalizing finder’s fees was a necessary action to promote capital formation for small businesses and eliminate the risks caused to issuers and investors resulting from the treatment of this common practice as illegal under California securities laws. Continue reading →