California Corporations Code Section 25206.1, which became effective January 1, 2016 permits “finders” to be exempt from broker-dealer provisions of California securities laws. In other words, this new section legalizes payments of finder’s fees by an issuer of securities to a person who introduces one or more accredited investors to that issuer, regardless of whether that person is a registered broker.
The exemption requires numerous conditions for the finder, including:
- the finder must be a person, not an entity
- the transaction must be a sale of securities by an issuer of the securities in California
- the size of the transactions for which the finder is engaged must not exceed a purchase price of $15 million in the aggregate.
Additionally, there are prohibitions on what a finder can and cannot do, i.e., finders cannot advise any party to the transaction regarding the value of the securities or advisability of the investment and finders cannot sell or offer to sell any securities of the issuer that the finder owns. Finders must also register with the Commissioner of Business Oversight and renew his/her registration annually. A full text of Section 25206.1 can be found here.
The SEC’s Advisory Committee on Small and Emerging Companies has made recommendations related to finders, but the SEC has yet to adopt similar exemptions for finders. Thus, any transaction conducted outside of California will also be subject to the federal securities laws that currently only allow finder’s fees to be paid to registered individuals pursuant to broker-dealer regulations.