The California Department of Business Oversight (“Department”) has modified Section 25206.1 of the California Corporation’s Code (“Code”) which provides a broker-dealer registration exemption for the payment of finder fees to individuals who introduce California investors to California securities issuers.
California Exemption Requires Certain Conditions Be Met-
To qualify for the exemption, an individual has to meet a number of requirements. Those conditions include:
- The finder must be a natural person, not an entity;
- The transaction must involve a sale of securities by a California issuer of securities;
- The size of the entire transaction (not just the portion raised by a particular finder) may not exceed an aggregate of $15 million;
- The finder may not: negotiate the terms of the transaction; advise any party regarding the value of the securities or the advisability of purchasing them; sell any securities that are owned directly or indirectly by the finder; receive possession or custody of the actual funds in the transaction; participate in the transaction unless the transaction itself is permitted or exempt from California qualification; make any disclosure to any potential purchaser other than the name and contact information of the issuer, the name, type, price and aggregate amount of the securities offered and the issuer’s industry, location and years in business.
- The finder must obtain a written agreement signed by the finder, the issuer and the person introduced by the finder disclosing: the type and amount of compensation the finder will be paid; confirming the finder has not and is not providing the investor with advice regarding the investment; disclosing whether the finder also owns the securities; disclosing any conflict of interest; advising that the parties have the right to pursue legal remedies for breach of the agreement; and a representation that the investor is an accredited investor as defined in SEC Regulation D and consents to the payment of the finder’s fee; and
- The finder is not subject to either California or federal Regulation D Rule 506(d) “bad boy” disqualification provisions.
Ultimately, the conditions essentially require total and full disclosure to the investor and the finder must, in essence, be a true “finder” to receive finder fees, and may not be a salesman for the investment.
Form filing (initial/renewal)–
Eligible individuals must file with the Department of Business Oversight a Statement of Information for Finder Pursuant to the Code, accompanied by a $300 fee and any additional information the commissioner requests. Finders must submit amendments to the Statement within 10 business days of the occurrence of a change. Finders may renew the exemption by annually filing the Statement accompanied by a $275 fee and any additional information the Commissioner requests.
Record-keeping-
Finders must maintain and preserve the written agreement and other records for a statutory-prescribed time-period at a Statement-designated location. The records are subject to commissioner inspection at any time.
Conflict between California Law and SEC Current Policy-
The modified California law only permits the payment of finder’s fees in transactions involving California based issuers, finders and investors, and for transactions conducted exclusively within California. Transactions conducted outside of California, however, are subject to a conflicting SEC policy.
Currently, the SEC treats transactions involving payment of finder’s fees to non-registered persons as violations of Section 15(a) of the Exchange Act, which carries with it potential fines and disciplinary actions. Until the SEC changes its current policies, therefore, any transactions conducted outside of California and not involving California based investors, issuers and finders are still at risk of SEC enforcement actions.