Hedge funds, private equity funds, venture capital funds and other types of private funds commonly utilize third parties to promote their funds and raise capital from potential investors. These third parties are commonly referred to as “finders.” When entering into arrangements with finders, private fund managers should carefully consider the structure of this relationship, particularly if the finder is not a registered representative. Increasingly, the SEC and FINRA are focusing on whether or not a finder is acting in the capacity of an unregistered broker. Section 15 of the Securities Exchange Act of 1934, as amended, defines a "broker" as any person engaged in the business of effecting transactions in securities. As the term “effecting transactions in securities” is open to interpretation, the SEC has added some clarity to this term through a myriad of SEC No-Action Letters and enforcement actions. Factors the SEC uses to determine whether a finder is really acting as an unregistered broker include:
- Whether the finder provided advice to potential investors regarding the merits of the investment;
- Whether the finder played a material role in the negotiation of the terms of the investment;
- Whether the finder has a history of involvement in the sale of securities; and
- Whether the finder received transaction-related compensation based in whole or in part on the success or amount of the investment.