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Is it a violation of SEC Regulations for a consultant to collect a commission on VC or PE Fund investment in client's company?

Atlanta, GA |

SEC regulates that only licensed brokers can receive a commission capital raised through Private Placement Memorandum under REG D offerings with accredited investors. What about money raised from venture capital and private equity funds negotiated through a term sheet and not a PPM? The person is representing the company as their financial representative to help find the investors and help negotiate the terms. Can this only be done for an hourly rate, services fee, or can a commission on the investment amount be charged?
Disregarding whether or not PE Funds or VC funds like to pay commissions, is it legal for the entrepreneur to pay the commission?

Attorney Answers 3

Posted

This is a hot button topic to be sure.

The short answer is that so long as there is a commission paid that is tied to the amount raised it will require a registered broker/dealer this includes the attorneys. While in theory the SEC articulated some exceptions there really are none.

That said, and I know what you are thinking, everyone still does this right? Yep, but you know speeding is also illegal and everyone does it, but you can't say to the cop that stops you "but everyone else was going faster..."

Here’s a link to the SEC’s Guide to Broker-Dealer Registration: http://www.sec.gov/divisions/marketreg/bdguide.htm

See the discussion under the section entitled, “Who is required to register”.

You are in very complicated territory. I am a member of the ABA's Venture Capital and Private Equity Committee and bear witness to a great many listserve discussions where these issues are discussed and debated all the time. Even very experienced attorneys often get this very wrong. So you are strongly urged to consult your own securities counsel to ensure you do everything within full compliance.

Most of us here, including myself, offer a free phone consult.

Best regards,
Frank
Natoli-Lapin, LLC
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Asker

Posted

Thanks, interesting, In trying to find the answer, half a dozen transfers within FINRA finally got to an investigator in the Corp Finance Compliance division that responded this way: raising capital through VCs and PE funds is not subject to the security laws of 1933/34 and REG D exemptions requiring broker dealers since not being sold to individual investors, and money is not being transferred from multiple investment accounts to be held in escrow under terms of a PPM Reg D offering. As a negotiation between company and PE fund or VC Fund, under a term sheet transaction, no B/D involved to peddle the securities in the company. Finders Fees are OK on these transactions.

Asker

Posted

Also should have, I have a call into SEC to confirm their side of this and to confirm the FINRA take on it.

Frank A. Natoli

Frank A. Natoli

Posted

Yes, I think your follow up is accurate in context. The SEC doesn't confirm anything via a phone call. I can assure you that all the parties involved if they are indeed institutional investors will have very competent legal advisors. I suggest you do the same. All the best, F.

Asker

Posted

UPDATE: spoke with SEC attorneys, and even with the sale of securities to Venture Capital and PE firms, companies cannot pay an unlicensed finder. Beside the finder getting in trouble, the company could be charged with aiding and abetting fraudulent activities. OUCH. I even asked about M&A firms that help get capital for acquisitions and they said that was illegal and he would be happy to have me give him a list of firms... HA. I told him that with that information it was really disturbing because it is virtually impossible for a firm to raise the $1M to $5M round without getting help and B/Ds won't touch pre revenue or even little revenue deals raising that small of money. I told him our only hope is that the JOBS act loosened that up some and he said he hoped so too but it would be a while before we saw any rulings on regarding what could be done under the JOBS act. Not very good news it seems.

Posted

A useful resource for you to further ascertain the nature of fund marketing by others is the library on the website of the Third Party Marketers Association, www.3pm.org.

The foregoing is not legal advice nor is it in any manner whatsoever meant to create or impute an attorney/client relationship.

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Posted

I recently had a prospective client ask me a similar question. He wanted to structure a situation whereby he could earn a percentage of the monies raised in a private offering. Like the first answer said, you cannot unless you are registered as a broker or a dealer pursuant to the Securities and Exchange Act of 1934. And yes, others are doing it, as the prospect said, but he was attempting to get a legal opinion from me, which I would not do with that scenario. There may be a way to be compensated for raising money if you were employed by the offerer and your compensation was not tied to the amount of money raised, in other words, you are paid a fixed salary. Attempting the latter scneario should involve the review of a securities attorney and after a review of any recent SEC No-Action letters, as the regulatory landscape does change and evolve. By in no way is it recommended that you embark in any such activity without the advice and consult of an attorney experienced in SEC regulation.

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