"Raising capital privately is frequently a frustrating experience for many small to mid-size businesses," Stephen Goodman wrote in a recent article for Bloomberg Law's Securities Regulation & Law Report. "Many do not have connections to high net worth individuals or institutions that would be likely to invest in their business, nor do they have the bandwidth to research who potential investors might be."
In his article, Goodman, a partner in Pryor Cashman's Corporate Group who represents emerging companies, examined how recent amendments to SEC regulations governing broker activity impact issuers who wish to engage in private placements, but also plan to use finders.
While there are registered broker dealers who will work on small transactions for emerging entities, many entrepreneurs will find themselves dealing with unregistered brokers, commonly known as "finders," who offer to raise capital in exchange for a percentage of the funds raised or other compensation, Goodman said.
"As a result of the amendments [to Rules 504 and 506], an issuer's failure to determine whether the finder/broker is a 'bad actor' may result in losing the exemption from registration for the offering," he explained. "Bad actor" disqualification provisions, also known as "bad boy" rules, prohibit the directors, officers and significant shareholders of the issuer from participating in exempt securities offerings if they have been convicted of, or are subject to court or administrative sanctions for, securities fraud or violations of other specified laws.
Under the amended rules, issuers must consider whether any "covered person" involved in the offering is the subject of a disqualifying event, such as a criminal conviction, court injunction or SEC disciplinary order. "Covered persons" include the issuer, any predecessor, affiliated issuer, director, executive or officer participating in the offering, among others.
At the very least, Goodman advises issuers to ensure that any finder engaged to help raise funds represents that they - as well as each of their directors, executive officers or other officers involved in the offering - have not committed one of the disqualifying acts listed in the bad actor rules.
The full Bloomberg article can be read here.
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