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Finders…Beware

A Finder by any other name would smell…like a Finder.  With all due respect to William Shakespeare, the SEC, in a recent no action letter, once again confirmed its longstanding position that regardless of how you dress it up, a “finder” receiving fee-based compensation for introducing investors would be required to register as a broker-dealer.

Brumberg, Mackey & Wall, P.L.C, a law firm in Virginia, requested assurance that the Staff would not recommend enforcement action if the law firm introduced its client, Electronic Magnetic Power Solutions Inc. (EMPS), to potential investors under the following conditions: the law firm (i) would not engage in any negotiations; (ii) would not provide any contact with information about EMPS that could be used in negotiations for financing; (iii) would not have any responsibility for, nor make any recommendations concerning the terms, conditions or provisions of any agreements relating to the proposed financing; and (iv) would not provide any assistance to any such contact or EMPS with respect to the proposed financing.  The law firm would, however, receive a ‘cash referral fee’ ranging from 1% to 5% of the financing proceeds.

By letter dated May 17, 2010, the Staff reiterated its position that “a person’s receipt of a transaction-based compensation in connection with these activities is a hallmark of broker-dealer activity.  Accordingly, any person receiving transaction-based compensation in connection with another person’s purchase or sale of securities typically must register as a broker-dealer or be an associated person of a registered broker-dealer.”   Furthermore, the Staff noted that “the introduction to EMPS of only those persons with a potential interest in investing in EMPS’s securities implies that BMW anticipates both “pre-screening” potential investors to determine their eligibility to purchase the securities, and “pre-selling” EMPS’ s securities to gauge the investors’ interest.”

The no action letter may be found at http://www.sec.gov/divisions/marketreg/mr-noaction/2010/brumbergmackey051710.pdf.

Accordingly, participants in capital raising activities must carefully assess their actions, as the SEC has once again reiterated that the substance of the transaction will be analyzed, regardless of the title of the introducing party.  Failure to register as broker-dealer, or an associated person of a broker-dealer, has significant regulatory ramifications, including the institution of enforcement proceedings.