By Jay Fishman, J.D.
Senior Writer Analyst, CCH, Inc.
An emerging “hot” topic in Blue Sky law is that of finders. A “finder” can be a broker-dealer or agent that introduces a customer to the broker-dealer or agent who will make the actual offer or sale of the issuer’s security to that customer. Similarly, a finder can be an investment adviser or investment adviser representative that introduces a client to an investment adviser or investment adviser representative who will provide the client with the actual investment advice. The question becomes what, if any, regulation should the state impose on the finder, i.e., the introducing broker-dealer or investment adviser.
The two states that have most recently adopted regulations on finders—in 2006—are South Dakota and Texas. South Dakota defines a finder as a person who directly or indirectly: (1) locates, introduces or refers any person to an issuer; (2) does not give investment advice about the advantages or disadvantages of an investment; (3) does not participate in any presentations or negotiations about any material term of an investment; (4) does not receive compensation based on the amount of any investment made but may otherwise receive compensation, with the compensation contingent on a potential investor actually investing; and (5) does not receive any compensation unless the amount is disclosed by the issuer to the investor before the sale of any security. A "finder" does not include a broker-dealer or agent. South Dakota allows a commission to be paid to a finder for soliciting prospective buyers in connection with the State’s intrastate limited offering transactional exemption. South Dakota has also determined that a commission paid to a finder does not violate the conditions of the state’s 25-purchaser limited offering transactional exemption.
Texas defines a finder as an individual who receives compensation for introducing an accredited investor to an issuer or an issuer to an accredited investor for the sole purpose of creating a potential investment in the issuer's securities. The finder is prohibited from negotiating the terms of the investment or from advising either party about the advantages or disadvantages of entering into the investment. An individual registered as a finder may not register in any other capacity but a registered general dealer may engage in finder activity without becoming separately registered as a finder. The activities, required disclosures and records for finders are specified. Finders are exempt from dealer supervisory requirements.
States that previously issued regulations on finders include Iowa and Michigan. An Iowa interpretive opinion from 2001 determined that investment adviser representatives, banks, attorneys, certified public accountants, broker-dealers, agents or insurance agents who refer clients to an investment adviser for no special compensation are excluded from the "investment adviser" definition but not from the "investment adviser representative" definition because the SEC definition of an investment adviser representative, relied on by the states, does not contain exclusions. Michigan defines a "finder" as a person who, for consideration, participates in the offer to sell, sale, or purchase of securities or commodities by locating, introducing, or referring potential purchasers or sellers but excludes from its “broker-dealer” definition a person acting solely as a finder and registered under the Michigan Securities Act or acting as finder incident to the state’s merger transaction exemption. Michigan’s definition of an investment adviser includes a person who acts a finder in conjunction with the offer, sale or purchase of a security.
California has solicited comments from the securities industry, due December 28, 2006, on how the state should regulate finders.