Finder

An issuer asks a well-connected businessman who is not registered with any firm to introduce it to investors, offering him a percentage of whatever is raised. What is the problem?

1. A.Nothing, provided he is described as a finder rather than as a broker in the documents.Wrong. The description in the documents does not change what the person is doing or how he is paid.
2. B.Nothing, provided the issuer files his name with the Commission on the Form D.Wrong. Disclosure of a person on the notice filing does not cure unregistered broker activity.
3. C.Paying transaction-based compensation to an unregistered person soliciting investors is broker activity requiring registration.Correct. Compensation tied to the amount raised is the classic indicator of acting as a broker.
4. D.Only that his fee must be capped at the same percentage the placement agent receives.Wrong. The issue is registration, not the size of the fee.

Why: A person who solicits investors and is paid based on the amount raised is receiving transaction-based compensation, which is the hallmark of acting as a broker under the Exchange Act. Section 15 requires a person effecting transactions in securities to be registered, and paying an unregistered finder in this way exposes both the finder and the issuer. It also creates a problem inside the offering, because compensation to an unregistered person can affect the availability of an exemption and is a matter a placement agent should identify in its own review. The safer arrangements pay for genuinely non-transactional services on a basis unconnected with whether a sale occurs.

In a firm commitment underwriting of a program, the underwriter acts as:

1. A.A principal, buying the units and bearing the risk of any it cannot resellCorrect. Firm commitment means the underwriter takes ownership, and with it the inventory risk.
2. B.An agent, leaving the issuer to bear the risk of unsold unitsWrong. That describes a best efforts arrangement, which is the opposite structure.
3. C.A finder, entitled to a fee but under no obligation to place unitsWrong. A finder introduces parties and never takes a position in the offering at all.
4. D.An escrow agent, holding subscription funds until the offering closesWrong. That is a separate function, usually performed by a bank rather than by the underwriter.

Why: In a firm commitment the underwriter buys the securities from the issuer and resells them, which makes it a principal in the distribution. Because it owns the inventory, the underwriter carries the risk of anything it cannot place. That is the defining contrast with a best efforts arrangement, where the underwriter acts as the issuer's agent, places what it can, and leaves unsold units with the issuer. The compensation structures follow from this: a principal earns a spread, an agent earns a fee or concession.

A finance company that is not registered as a broker-dealer introduces institutional customers to Vantry Brokerage and asks to be paid a share of the commissions those customers generate. May Vantry pay it?

1. A.No. A member may not pay a person who, by reason of receiving such payments and the activity behind them, would be required to register as a broker-dealer.Correct. Transaction-based pay for bringing in securities business is the fact pattern the prohibition was written for.
2. B.Yes, provided the arrangement is disclosed to the customers the company introduces.Wrong. Telling the customers creates no registration exemption, and their knowledge is beside the point.
3. C.Yes, because the introduced customers are institutions and the prohibition exists to protect retail customers.Wrong. The prohibition is written about the status of the payee, not about who the eventual customers turn out to be.
4. D.Yes, so long as the finance company never holds customer funds or securities.Wrong. Custody is one indicator of broker-dealer activity among several, and receiving transaction-based compensation is on its own enough to raise the registration question.

Why: A member may not pay compensation, fees, concessions, discounts or other allowances to a person who is not registered as a broker-dealer where, by reason of receiving those payments and the activities behind them, that person would be required to register. Compensation tied to the transactions a person brings in is the hallmark of activity requiring registration, so an unregistered finder taking a share of commissions puts both itself and the paying member in difficulty. The analysis turns on the payee's status and conduct, not on the sophistication of the eventual customers or on whether anyone was told. A payment unconnected to any transaction raises a different question, because it removes the very feature that drives the registration analysis.

A Rule 506(b) offering's bad actor disqualification analysis needs to cover not just the issuer's own officers and directors, but also certain third parties compensated for soliciting purchasers. Does Rule 506(d) reach a paid solicitor who is not otherwise affiliated with the issuer?

1. A.No, Rule 506(d) reaches only persons formally affiliated with the issuer, such as officers, directors, and significant equity owners.Wrong. This misses the separate compensated-solicitor category Rule 506(d) also covers.
2. B.Yes, but only if the compensated solicitor is itself a registered broker-dealer; an unregistered finder receiving compensation falls outside Rule 506(d)'s coverage.Wrong. Rule 506(d)'s coverage of compensated solicitors is not limited to registered broker-dealers.
3. C.No, because bad actor disqualification analysis is limited exclusively to persons who have an ownership stake in the issuer.Wrong. Ownership stake is not the basis for the compensated-solicitor category; being paid to solicit purchasers is.
4. D.Yes -- Rule 506(d) covers any person paid, directly or indirectly, for soliciting purchasers in connection with the offering.Correct. A compensated placement agent or finder is independently a covered person.

Why: Yes. Rule 506(d)'s bad actor disqualification provisions specifically cover any person that has been or will be paid, directly or indirectly, remuneration for soliciting purchasers in connection with the offering -- a compensated placement agent or finder is itself a covered person.