Katherine Lofft on the Perils of Using Unlicensed Brokers to Connect to Investors
There are myriad opportunities right now for new businesses and talented entrepreneurs targeting healthcare, particularly in the IT sector. It’s an exciting time for people and companies looking to harness the promise of innovation and the power of technology to improve health care delivery, empower patients and lower costs.
However, even the best ideas usually require money to get off the ground. Sometimes they require more capital than the founders or management, or their family and friends, have available. While there are many individuals and institutions around the country with money to invest, it can be hard for the average start-up or emerging business to identify and appeal to them, or to distinguish itself from competing investment opportunities.
In view of existing prohibitions on the use of general solicitation and advertising in private offerings of equity, many entrepreneurs, founders and early-stage business leaders turn to so-called “finders” (sometimes called “brokers” or “promoters”) to access capital. Finders are typically individuals, often with no other relationship to the company, who commit to leverage their network of contacts and connections to help a company identify investors and/or secure funding. The consideration under these arrangements often involves payment of a fee or commission based on a percentage of the funds invested.
Now, you might be asking, what’s the problem with this kind of arrangement? Only this: If an individual is involved in the purchase or sale or securities and receives or expects to receive a commission (whether payable in cash or other consideration, such as stock) as a result of the transaction, the individual must be properly licensed under federal, and often under state, law. The use of unlicensed “finders” or brokers can result in serious consequences not only for the individual finder or broker, but also for the company/issuer.