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Allowing the Use of Unregistered Finders Would Help Small Businesses

Abstracted from: Finders Keepers
By: Ronald Fink
CFO - February 2005, Pgs. 63-65

Unregistered finders could help small businesses raise capital. In a world where registered securities representatives increasingly work for large firms reluctant to participate in small deals, owners of small public companies usually have trouble finding intermediaries to help them raise capital. Banks' risk-management policies often prevent them from making loans to small, not-well-known companies, and major investors also prefer larger enterprises. Even venture-capital firms, once the financial backbone of startups, now favor the somewhat-safer later-round investment. Ronald Fink reports that small businesses would happily use unregistered intermediaries to scout investors for relatively small issues. Unfortunately, a 70-year-old rule under the Securities Exchange Act of 1934 prohibits the use of unregistered finders.

Occasionally a no-action letter.
The SEC has occasionally issued no-action letters to a few unregistered individuals, permitting them to receive fees for introducing investors to companies or partnerships, provided they do not make a profession of being an intermediary. For example, the author mentions that in 1991, the SEC permitted singer Paul Anka to accept fees for introducing his personal acquaintances to a general partner at a hockey team, who then solicited them as limited partners. The no-action letter states that the SEC would take no action against Anka if he did nothing beyond introducing people and did not make a living out of acting as an intermediary for securities investors. Since unregistered intermediaries must, by definition, be amateurs, the small-business owner needing help from a finder can look only at friends and their acquaintances.

Small-business associations would like to see a modification in the regulations, allowing professional but unregistered representatives to fill the gap between major investment banks and personal social networks. The American Bar Association is also expected to recommend relaxing the prohibition against unregistered finders.

Change is an uphill battle. Despite the lobbying efforts of small-business associations, major changes seem unlikely. The SEC and the NASD believe that a reasonably priced registered representative is available for any size of deal and that broad relaxation of the rules is therefore unnecessary. The SEC points to numerous stock frauds perpetrated by unregistered intermediaries who promoted stocks with false claims. Vector Medical Technologies, for instance, defrauded mostly physician/investors of approximately $16 million a few years ago. Tyco's lead director and compensation committee chairman, Frank Walsh Jr., collected an unregistered-finder's fee of $20 million for recommending that Tyco buy CIT Group, which less than a year later it had to sell for half the purchase price. Proponents of relaxed rules point out that registered intermediaries also participate in fraud, but the numerous recent corporate frauds have served to increase ­not reduce ­the impetus for regulatory oversight.

The author also observes that the NASD is the organization which registers securities representatives, and both the SEC and the NASD are unlikely to approve changes that reduce their own power. Minor tweaks are possible in the pragmatic application of regulations governing unregistered finders, but major change is almost certainly a long way off.

Abstracted from CFO, published by CFO Publishing Corp., 253 Summer Street, Boston, MA 02210

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