I frequently get questions along these lines: “If we pay someone a commission to make introductions to investors, that’s okay, right? I mean, people do it all the time.”
Then we get into discussions about broker-dealer vs. finder and the requirements for a finder under the Texas statutes. However, if someone is getting paid a commission for introductions to investors, you can bet he or she is acting as broker and better have a license.
Another unregistered broker-dealer case came down from the SEC last month. In this case, an investment fund retained Stephens as a “consultant” to find potential investors. Stephens had not been registered with the SEC in any capacity since he was barred from association with investment advisers since 2002. However, due to connections with the fund and a long history in the industry, he still had contacts with potential investors.
Stephens’ consulting arrangement entitled him to a percentage of all capital commitments from investors he introduced, which was revised for other introductions. He earned about $3.8 million on commitments of $569 million, which is not too shabby. He was also involved significantly in the investor solicitation process and provided services way beyond the “finder” function.
Fines, industry suspensions and cease-and-desist orders were delivered to the fund and the principals of the fund, proving that someone else’s improper conduct can hurt the issuer and the individuals involved (another thing I hear: “If it is a problem, it isn’t my problem, right?” Wrong.). Although the facts of the case seem egregious, most situations seem to be closer calls. However, the results are usually the same, and calling someone a “consultant” (a frequent suggestion) does not change the analysis.
For $3.8 million (or even a lot less), just get licensed or hire someone who is.