The California Department of Business Oversight has adopted final rules 10 CCR §260.211.4-§260.211.7 implementing California’s exemption from broker-dealer registration for certain individuals acting as finders in securities transactions. The exemption, codified on January 1, 2016 at §25206.1 of the Corporations Code, provides long-sought clarification of the scope of allowable activities for finders in securities transactions in California and creates a streamlined regulatory framework in which finders can legitimately provide services. Most significantly, it permits finders who satisfy the requirements of the exemption to receive transaction-based compensation.
The exemption is available to individuals (not otherwise registered as a broker-dealer or agent) who meet the definition of a finder set forth in §25206.1(a) and who comply with the disclosure, record-keeping, and other conditions of the exemption, including filing an annual Statement of Information with the Commissioner on the form prescribed in rules §260.211.4 and §260.211.5.
The Statement of Information form requires individuals seeking to rely on the exemption to provide their name, social security number (optional), business and residential address, telephone number, email address, and the location of books and records required to be maintained pursuant to the exemption. They must also confirm they are not registered as an agent or have committed any of the acts or satisfied any of the circumstances described in, or are subject to any order pursuant to §25212 of the Corporations Code or Rule 506(d) of Regulation D under the Securities Act of 1933. An initial Statement of Information must be filed before engaging in activities in reliance on the exemption.
A renewal Statement of Information must be filed annually, within 30 days of the anniversary of the initial Statement of Information. In addition to reconfirming the information above, individuals renewing must also complete the information in Section II of the form which contains representations as to whether, during the prior 12 months, the individual has complied with the requirements of §25206.1(a) and §25206.1(e)—and with respect to §25206.1(a), will continue to comply— has committed any of the acts or satisfied any of the circumstances described in §25212 of the Corporations Code or Rule 506(d) of Regulation D under the Securities Act of 1933, and has received transaction-based compensation. A finder who is unable to or fails to make the required representations is not eligible to renew the exemption.
Any changes to the information in an initial or renewal Statement of Information must be filed with the Commissioner on an amended Statement of Information within 10 business days of the change. A finder must also use the Statement of Information form to notify the Commissioner within 15 calendar days of the finder withdrawing from engaging in business under the exemption. The fee for the initial Statement of Information is $300; the fee for each renewal is $275. There is no fee for filing amendments or withdrawal.
Currently, the Statement of Information must be filed in paper form. The completed form and filing fee—and in the case of an initial Statement of Information, a completed Consent to Service of Process—should be submitted to the Department of Business Oversight, 1515 K Street, Suite 200, Sacramento, California 95814. The anticipated date for electronic filing is late 2018.
Although this exemption provides individuals who regularly or even occasionally provide finder services in California with much needed clarity and the crucial ability to receive transaction-based compensation, it has several limitations that should be carefully considered:
- 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; it continues to prohibit certain activities typically deemed to be outside the legitimate scope of finders, such as participating in negotiations, taking custody of investor funds, conducting due diligence, and disclosing issuer information (except certain permitted information).
- Conditions that must be satisfied in addition to the filing of the Statement of Information include (i) obtaining the informed, 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.
- Section 25206.1 provides an exemption from the broker-dealer licensing requirements only; finders must still comply with all other aspects of applicable securities laws when engaging in activities involving the offer and sale of securities. Moreover, finders engaging in transactions outside of California, including the introduction or referral of investors from outside of California, will still be subject to federal law governing the licensing of broker-dealers. Currently, no similar exemption from broker-dealer licensing exists at the federal level.
Moreover, any of the following, 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).
Individuals who are ineligible for the exemption and acting as a broker-dealer as defined in §25004 of the Corporations Code or as an agent as defined in §25003 of the Corporations Code, must register as a broker-dealer pursuant to 10 CCR §260.211 or an agent pursuant to 10 CCR §260.210, unless the individual is otherwise exempt from §25210 of the Code. It is unclear whether an individual who becomes ineligible may start over by refiling the original exemption or the circumstances under which the original exemption may be refiled.
Accordingly, it is crucial that any individual seeking to rely on the exemption pay close attention to the conditions required to satisfy the exemption and carefully monitor ongoing compliance
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