By: Robert Hawn
In representing start-up companies in Silicon Valley I have found that one of the biggest challenges facing founders is raising early stage capital. Emerging growth companies often do not have the necessary relationships that can lead to investment funding. To find these relationships, the company may retain a finder. A finder is an individual who can introduce the company to funding sources, typically in exchange for a commission. Because these finders were not licensed as broker-dealers of securities (essentially, someone who helps to sell securities of a company to investors), they were frowned upon by the law. A few years ago, stricter laws were enacted that created strong disincentives to start-ups to pay commissions to finders.
On October 10, 2015, the Governor signed into law AB 667 , a bill sponsored by Assembly Member Wagner, which creates exemptions to the broker-dealer laws for finders and their client companies. The act, which added Section 25206.1 to the California Corporations Code, provides a balance between protecting investors while easing requirements for fund raising by small companies. Because the law was passed during regular session and not an urgency measure, it will likely become effective January 1, 2016.
So, What Does The Bill Do?
Before the new law, any finder who was not licensed by the State as a broker-dealer of securities could not introduce any company, start-up or otherwise, to potential investors. If an unlicensed broker-dealer provided an introduction, among other things, the investor could get their money back from the company and from the unlicensed broker-dealer, who would be personally liable for the investor’s money.
Under the new law, an unlicensed finder can make an introduction if certain requirements are met. Among them is the requirement that the finder can only introduce “accredited investors”. These are investors who satisfy income or wealth thresholds, have an executive position with the company, or are certain types of entities. Among other requirements, the finder can’t (i) provide an introduction where the aggregate sale price of the securities is more than fifteen million dollars, (ii) participate in negotiating any of the transaction’s terms, or (iii) provide any advice regarding the value of the securities purchased. The law sets forth the only information the finder can disclose regarding the company. The finder also is required to make a filing with the Department of Business Oversight and pay a $300 filing fee, which must be renewed each year and filed with an additional $275 filing fee. There are other requirements that have to be satisfied, including specific disclosures to be made to the potential investor.
Positive Aspects To The New Law
There are a number of positive aspects to this new law. First, start-up companies can now use finders, and finders can now get some value from the relationships they may have with high net worth individuals, or companies, which may want to invest in start-up companies. Second, lawyers like me who are asked about using finders now have a relatively clear direction of how start-up companies can use them.
As with anything in fundraising, this new law is just one part of a large and somewhat technical body of securities laws that need to be reviewed with your lawyer to make sure your company is in compliance. Failure to comply with these laws can expose anyone who runs one of these companies to personal liability for the amount of the investment. That’s why it’s really important that before you start any kind of fundraising activities, you should confer with a lawyer that works in the fundraising area.
As a former chair of the State Bar’s Business Law Section , I can’t help but note that this bill came about as the result of the hard work of many members of the Section’s Standing Committee on Corporations. They are to be congratulated on their hard work in bringing clarity and rationality to start-up fundraising activities.
The information appearing in this blog does not constitute legal advice or opinion. Such advice and opinions are provided by the firm only upon engagement with respect to specific factual situations. Specific questions relating to this article should be addressed directly to Strategy Law, LLP.
