If you are receiving a fee for assisting someone else’s company in raising money, then you must operate within the confines of securities laws. These laws provide three different ways in which one may legally raise money for another company for a fee. You can’t get a “commission” or “bonus” or anything of value for bringing an investor to another company or person unless you fit into one of these three categories:
Broker Dealer License
First, if you are licensed and are registered with an SEC registered broker dealer, you may receive commissions and other forms of compensation for raising money in public or private offerings (e.g. private placements). The newest form of registration from FINRA is designed to license and regulate those who operate as “investment bankers,” called a “Series 79 license.” This license allows a holder to collect commissions and other fees for raising funds for an offering of equity (e.g. stock) or debt (e.g. notes or bonds). In addition to passing the licensing test, you’ll need to associate with a broker dealer.
Second, if you take a limited role in the raising of funds and are paid a flat or hourly fee, as opposed to commissions based on funds raised, you may be able to be paid a finder’s fee for introducing investors to others. A finder’s fee can only be paid to a finder so long as:
- The finder isn’t involved in negotiations of the securities being sold.
- The finder doesn’t discuss the details of the securities.
- The finder isn’t paid based on money raised (e.g. no commission).
- The finder doesn’t perform “finding” services on a regular basis.
In sum, a finder’s fee may be paid but only to someone who makes introductions of potential investors, and the fee amount must be based on some factor other than compensation relating the persons or amount of securities sold to those introduced by the finder.
Director or Officer of Offering Company
Third, you may be able to assist in raising funds for another if you are an Officer or Director of the company whom you are raising money for. The SEC promulgated Rule 3a4-1 which is a Safe Harbor from enforcement and allows someone who serves as a paid Director or Officer to assist in selling the company’s securities. There are many ways to qualify under this Rule but the most common is to meet the following criteria:
- Be paid as a Director or Officer by salary or other criteria that is not linked to sales of securities made (e.g. be the CFO or Treasurer and offer financial consulting advice in addition to working with potential investors).
- Can’t be associated with a Broker Dealer and cannot have a prior SEC disciplinary history.
- Should stay on with the company following closing of the offering so as to show your purpose as a Director or Officer was not just for raising funds.
- Takes a passive and restrictive role in selling the securities and refers to the CEO or President for details and negotiations.
Failure to comply with the securities laws can result in civil and criminal action. In addition, investors who can claim a failure to comply with the laws outlined above are able to rescind their investment and can subject the company’s founders and the person soliciting the investment with personal liability for any losses.
In 2012, the JOBS Act amended the rules for private placement offerings (aka “PPMs”) to allow companies to advertise and solicit their offerings to prospective investors. Under prior law, a PPM could not be marketed or solicited to people whom the offeror did not have an existing relationship with. Hence, the use of the word “private offering” in the labeling of these types of investments.
This new type of offering allows advertising and general solicitation and is known as a Rule 506 (c) Offering. Under Rule 506 (c), the company raising money could create a website soliciting the funds, or they could hold seminars or meetings with potential investors and could solicit the investment of funds from those in attendance. This is a significant change to the prior offering rules that clearly prohibit such activities.
Under the new Rule 506 (c) Offering there is one hitch: the person raising funds may only accept funds from accredited investors. An accredited investor is someone who has $200K in annual income ($300K if married) or $1M in net worth (excluding equity in home). The accredited investor status must be documented by the investor or certified by a third party such as an accountant or financial planner. This verification rule is a new requirement for Rule 506 (c) Offerings and is ALWAYS required if you make general solicitation and marketing efforts for investors.
Under the traditional Rule 506 offering, now known as Rule 506 (b), you may not make general solicitations for investors and that is the major downside. However, you may raise money from up to 35 unaccredited investors per offering and that is something you cannot do under the new Rule 506 (c). Keep in mind, the offering must remain private. So, moving forward, those seeking to raise money under Regulation D approved offerings have two options. First, raise money under the current rule and you can accept up to 35 unaccredited investors but are restricted from advertising. Or, second, only accept money from accredited investors but be allowed to advertise the offering. You don’t get both options in one (advertising and unaccredited investors) but at least you now have another option in being allowed to advertise and solicit under the new rules.
Here’s a quick chart the outlines the two Rule 506 Options. The key differences are highlighted below.
||Rule 506 (b)
||Rule 506 (c)
Total Amount You Can Raise
|Offering Docs Required
|Offering Memorandum, Sec Form D Filing, State Securities Filing, Company LP or Operating Agreement, Investor Suitability Quest.
Offering Memorandum, Sec Form D Filing, State Securities Filing, Company LP or Operating Agreement, Investor Suitability Quest.
Un-limited accredited investors and up to 35 unaccredited investors who are sophisticated enough to invest.
|Accredited investors only. Unlimited accredited investors. Must verify they are accredited.
|Marketing of Offering
||Must remain private. Can only market to persons with an existing relationship.
Marketing and general solicitations are allowed. You amy market via websites, e-mail campaigns, and at events or meetings.
The SEC’s final regulations implementing the JOBS Act and allowing advertising in the raising of capital went into effect last week on September 23, 2013. This is a significant change in the laws relating to the raising of capital and is one that has been discussed and written about extensively. Prior to last week all raising of capital by real estate investors or small business owners needed to consist of private methods whereby the person raising capital could only talk to persons whom they knew or had a prior relationship with. They could not make a “solicitation” for investment from anyone else without having to go and do an extensive and costly public SEC Offering.
Under the new rules in effect last week, those raising capital may now make public solicitations to anyone and may make presentations at meetings or seminars, on websites, or through social media and they don’t have to work with people they know or have a prior existing relationship with.
In order to comply with the new rule, known as Rule 506 (c), those raising capital must create offering memorandum and legal documents in accordance with the new rules and must make a notice filing to the SEC to claim compliance with the new law. Additionally, the new advertising rules will only allow those raising capital to accept funds from accredited investors. Accredited investors are those who have $1M net worth (excluding equity in residence) or $200K annual income single or $300K income married. The person raising capital must take steps to verify an accredited investors status and can’t just rely on the investor stating that they are accredited. While some offerings do allow for up to 35 unaccredited investors, the rule allowing for unaccredited investors cannot be applied when advertising has been used in the offering and as a result is not available under the new rule.