RMG SPEAKS Finders Keepers, Losers Weepers; and Broker-Dealers.

What’s the number one thing start-ups need? No one would argue that capital is the top answer.

And who raises capital for start-up businesses? Ordinary people like you and me? Not so fast.

The ugly truth that only securities lawyers, regulators and others in the know will tell you is that the only people or entities who can legally raise capital for businesses on a recurring basis (indeed more than once …… maybe just once) are properly licensed securities brokers. There may be thousands of so-called “finders” – companies that make capital introductions and receive compensation on a transaction basis – who operate in well appointed offices all over the place. Lawyers (and the Securities and Exchange Commission) will admit that many of these finders are breaking the law by acting as brokers (as defined by securities laws) who receive commissions without being licensed.

The Securities Act of 1934 is the statute by which broker-dealers are required to be licensed. Requiring brokers to be licensed is a good idea. Those selling securities are entrusted with the confidence of their clients in an industry where fraud and misdoings run ramped. Widows and orphans need protection ……. we all could use some protection from unscrupulous stock sellers.

However, not all activities that fall within the definition of securities brokering are created equally. Many start-ups are issuing stock, convertible debt, and other securities to so-called accredited investors, who are deemed to be sophisticated enough to protect themselves. Nonetheless, organizations (including RMG) need to address issues of broker licensing before getting paid for raising capital in the market for our clients. Those activities may or may not be the activities of a broker who is subject to Federal and state securities laws.

RMG has recently signed an affiliation agreement with Midtown Partners, a licensed broker-dealer. This agreement will allow RMG to receive transaction based commissions without violating laws. We are taking our Series 7, 63 and other exams to be securities brokers. It’s hard work, but its what we have to do to do what we do. We’re fortunate to be able to have an affiliation with such a quality group as Midtown.

Unfortunately, the point is that the rules related to broker-dealer registration need to be re-evaluated in light of so-called finders raising capital from accredited investors in a private placement of securities. Many securities practitioners agree.

We like taking exams like a Series 7 at RMG. That’s sport for us. But honestly; don’t we need to revisit broker-dealer rules in light of the realities of capital markets for start ups?


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