Capital is the lifeblood of a business. In fact, according to Forbes, running out of money is the most common reason businesses fail. As such, businesses are always seeking it. However, raising capital can be difficult. It not only requires a significant dedication of time and effort but also connections to funding resources. Many business owners do not have the time to dedicate to this task because they are busy running their company and/or lack connections to funding resources. Thus, they turn to brokers.
The Role of Brokers in Investment Deals There is a whole market of people who broker investment deals on behalf of companies. These brokers promise to bring investors to the table in exchange for a piece of the deal (i.e., finder fees). Finder fees generally range from 5% to 10%. For many business owners, this is well worth the bargain. What typically follows is that these business owners or brokers come to us, asking us to draft their agreement. They are usually shocked to learn that we can't because, unless the broker is registered with the SEC, they are not permitted to receive a commission.
Navigating Legal Implications In reality, this is how business often gets done. Most people typically get away with these improper maneuvers. As business attorneys, we often deal with the stark contrast between the letter of the law and how business actually works. We are not here to wag our fingers. Rather, our job is to educate clients on their exposure and empower them to make sound business decisions. Our main concern in these matters is not necessarily illegality but the business ramifications.
Understanding the Risks The real problem is that these deals are legally void. Any investments secured through an unregistered broker can be rescinded at any time. Thus, receiving investment through an unregistered broker can leave a company with a figurative knife hanging perpetually over its head, as investors can always ask for their money back. This can stifle the prospect of future investments since future investors may discover that your company can become undercapitalized at any moment.
From the Perspective of Unregistered Brokers This is also an issue from the unregistered broker's perspective. After successfully brokering a transaction for a company, the company can then turn around and not pay them, arguing that their agreement was void. The unregistered broker is left with minimal recourse as they cannot appeal to any regulatory body to enforce an illegal arrangement.
Strategies for Secure Investment Though this may be disheartening, there are ways to use an unregistered third party to secure investment if the third party is simply considered a finder. To do so, avoid paying the third party based on deal success, investment amounts, or other deal-related factors. Additionally, make sure that the third party only makes introductions. The third party should not (i) attend meetings between your company and the potential investor, (ii) attempt to explain or discuss the company, the investment, or deal terms with the potential investor, (iii) help prepare any deal materials, or (iv) handle any securities, monies, or other characteristics of securities transactions. Looking for legal expertise to navigate investment deals and protect your business interests? Contact the Law Office of Langston A. Tolbert P.C. Our experienced team can provide comprehensive legal counsel tailored to your specific needs. Additionally, take advantage of our complimentary fundability assessment to analyze how fundable your company is and identify key areas for improvement to attract investors and secure funding.
コメント