Clients often ask, “Can I use a finder when fundraising for my startup?”. A fundraising finder can provide introductions; however, contracting for fees dependent on a successful raise is NOT permitted. It is the hallmark of a broker-dealer relationship (using a registered broker-dealer) and the SEC takes this issue very seriously.
The federal law recognizes transactions with registered broker dealer consultants. You can check if the person is registered by following this link.
If the startup does not proceed with caution, it can be on the hook for various liabilities. The following consequences may transpire if the company uses an unregistered finder:
- The investors or acquirers brought to the company by way of a finder may subsequently sue the company for rescission of their purchase (money back plus statutory interest)
- The startup may lose securities exemptions for future raises
- The existence of a finder in prior transactions may prevent lawyers from rendering necessary legal opinions in a subsequent transaction
- The use of a finder may scare away sophisticated investors or acquirers, who wish to avoid the risk
All the above considered, it is best to use a registered broker dealer to consult your startup during fundraising. If not, you open up a can of worms that will likely harm your business in the future. Remember: introductions are OK but contingent fees are NOT.