Orange County Business Attorneys Discuss How to Avoid Fines and Sanctions by Only Using Registered Finders

July 18, 2016

It’s not easy being an entrepreneur. With many hurdles to overcome, it feels like the new venture is always on the verge of collapse. That’s especially true with raising capital. Initially, funding comes from the entrepreneur’s own savings or through the generosity of friends and family. A larger group of acquaintances may slowly become involved before angel investors, private equity groups, and venture capitalists decide to get involved.

The small business owner frequently feels like they spend more time raising capital than they do trying to turn a profit. That’s why many of them are tempted to use a “finder” to do the legwork for them.

Spend some time at venture capital seminars and you’re likely to run into quite a few professionals calling themselves finders or consultants. They raise cash for your business, and you don’t have to pay them unless they produce results. The finders fee you pay when they succeed may be expensive, but if they’ve done the hard work of putting you in touch with willing investors, then the expense is likely worth it.

However, it is important to proceed carefully when you’re beginning a relationship with someone who presents themselves as a finder. In most cases, the law requires that the finder must be a registered broker with the Financial Industry Regulatory Authority (FINRA) in order to be paid to provide these services. If they are not registered, then it may be illegal to pay them finders fees.

Many entrepreneurs can name instances in which other business owners have gotten away with using an unregistered finder without being fined. Nonetheless, that is not a guarantee that this will happen in your situation.

In fact, state and federal governments are developing keen interest in regulating finders and the fees they receive. That is why there are now laws that make it illegal to pay commissions or success fees to a finder who is not registered as a broker-dealer. A company that hires an unregistered finder may be sanctioned by regulators and will be held liable by investors. In addition, it may create a rescission right for investors which would allow them to demand that their entire investment be returned.  If your company has already spent that money, it may be difficult to keep the business going while complying with investor demands.

A new business is a fragile venture. As badly as capital is needed, it’s important to go about securing funding the right way. Failure to properly vet someone who identifies themselves as a finder can lead to the destruction of the company.

Contact Our Orange County Business Attorneys for Trusted Advice

At all times, it is essential to rely on trusted advice from experienced business attorneys.  For more information, contact one of our Orange County business attorneys at FitzGerald Yap Kreditor today at (949) 788-8900.