Effective January 1, 2016, new section 25206.1 of the California Corporate Securities Law (the “CSL”) exempted “finders” from the broker-dealer certification requirements set out in CSL section 25210, provided the finder satisfies the conditions set out in section 25206.1. Although there are a number of hoops to jump through, the new law does provide a way forward for persons who wish to act as finders without the necessity of complying with the more burdensome requirements of obtaining a broker-dealer certificate.
Under the new law, a “finder” refers only to a natural person who, for direct or indirect compensation, introduces or refers one or more “accredited investors” (as defined under Rule 501(a) of Regulation D under the Securities Act of 1933, as amended), to an issuer (or vice-versa), solely for the purpose of a potential offer or sale of securities of that issuer in an issuer transaction in California. The new section also sets out certain activities that the natural person may not engage in, such as participating in negotiations, advising as to value of the securities, and taking custody of any funds in connection with the transaction, among others.
To qualify as a finder, the finder will be required to file an initial statement with the Commissioner of the Department of Business Oversight before it begins any finder activities, and to pay a fee of $300. Thereafter, the finder will be required to file an annual renewal statement, pursuant to which it must make certain affirmative representations.
Concurrently with each introduction made by a finder, the finder must obtain the informed, written consent of the person introduced or referred by the finder to an issuer via a written agreement signed by the finder, the issuer, and the person introduced or referred. The agreement must disclose, among other things, (a) the type and amount of compensation that has been or will be paid to the finder in connection with the introduction or referral, and the conditions for payment of that compensation; (b) that the finder is not providing advice to the issuer or any person introduced or referred by the finder to an issuer as to the value of the securities or as to the advisability of investing in, purchasing, or selling the securities; (c) whether the finder is also an owner, directly or indirectly, of the securities being offered or sold; and (d) any actual and potential conflict of interest in connection with the finder’s activities and the issuer transaction. The agreement must also include a representation by the person introduced or referred by the finder to the issuer that the person is an “accredited investor” and knowingly consents to the payment of the finder’s compensation described in the agreement.
The finder is required to maintain and preserve, for a period of five years from the date of filing the initial notice, a copy of the notice, the written agreement described above, and all other records relating to any offer or sale of securities in connection with which the finder receives compensation as the Commissioner of the Department of Business Oversight may by rule require. The finder must also furnish to the Commissioner of the Department of Business Oversight, upon request, any records required to be maintained and preserved under section 25206.1. The Commissioner has not yet adopted any rules under section 25206.1.
A natural person who is effecting securities transactions and is not otherwise exempt from the broker-dealer requirements, or does not satisfy new section 25206.1, will be subject to the broker-dealer certification requirements. If a natural person does not meet the definition of a finder or does not satisfy all of the conditions of the new law, then any person introduced or referred by that natural person to an issuer and who purchases securities of that issuer in an issuer transaction following that introduction or referral, has the right to pursue any applicable remedy afforded under state law, including an action for rescission.
Read the full text of the bill.