Compensation of Finders In The Sale Of California Securities
Compensation Practice
The “finders” exemption, went into effect on January 1, 2016 at Corporations Code Section 25206.1. Finders who satisfy the requirements of the exemption can now receive transaction-based compensation on the sale of a security in California. The exemption is available to individuals (not otherwise registered as a broker-dealer or agent) who meet the definition of a “finder” as set forth in §25206.1(a) and who comply with the disclosures and record keeping requirements of the exemption, including filing an annual Statement of Information with the Commissioner on the form prescribed in rules CCR §260.211.4 and §260.211.5.
Any of the following acts, whether inadvertent or otherwise, render a finder ineligible for the exemption: (1) failing to file a renewal Statement of Information or pay the renewal fee before the filing due date; (2) failing to comply with any of the conditions in §25206.1(a); (3) performing any of the acts or satisfying any of the circumstances described in §25212 of the Corporations Code or Rule 506(d) of Regulation D; (4) failing to obtain any written agreement or make any disclosures required under §25206.1(e); (5) failing to disclose on the renewal Statement whether transaction-based compensation has been received; and (6) failing to maintain the records required under §25206.1(f).
Although this exemption provides individuals who provide finder services in California with the ability to earn a percentage of the transaction in accordance with an agreement, there are limitations to the definition including:
- The exemption is available only to natural persons in connection with transactions with an aggregate purchase price of $15 million or less and involving solely accredited investors.
- Other than the ability to receive transaction-based compensation, the exemption does not broaden the scope of activities permitted; such as participating in negotiations, taking custody of investor funds, conducting due diligence and issuer disclosures.
- The finder must obtain the written consent of each person introduced or referred by the finder to an issuer, in a signed written agreement disclosing the type and amount of compensation payable to the finder and certain other disclosures as set forth in §25206.1(e), and (ii) maintaining books and records in accordance with §25206.1(f) and rule 260.211.7.
However, this exemption does not allow for introduction of investors outside California, so we often see transactions that require a separate analysis of each component of the compensation. For example, how do we compensate all the brokers in a transaction including a California broker (real estate), securities and a finder on a 1031 exchange using a Delaware Statutory Trust, as a portion of the exchange property with out of state parties? Please contact us to discuss your compensation issue.
