by Peter J.Chepucavage
edited by Bill Singer, http://BrokeAndBroker.com
Unfortunately, the Securities and Exchange Commission's (SEC) Division of Trading and Markets (the "Division") once again chose not to clarify its previous positions in the area of permissable payments of finder's fees when it issued a letter to Brumberg, Mackey & Wall, PLC on May 17, 2010 that declined to grant No-Action relief concerning finder's fees. Brumberg, Mackey & Wall, P.L.C. May 17, 2010 http://sec.gov/divisions/marketreg/mr-noaction/2010/brumbergmackey051710.pdf (the "BM&W Letter").
In its initiating letter to the Division dated December 4, 2008, Brumberg, Mackey & Wall, PLC ("BMW") describes itself a law firm with an office located in Roanoke, Virginia. BMW is engaged principally in the general practice of law. BMW does not engage in the practice of securities law, nor is it engaged in any activities involving securities. BMW is not as a broker-dealer or investment advisor, and nor does it conduct its activities through a registered broker-dealer. Electronic Magnetic Power Solutions, Inc, a Tennessee corporation ("EMPS"), is a power electronics technology company whose mission is to develop and deliver inverter and converter products for photovoltaic and other renewable energy sources providing the highest total energy harvesting, lowest lifetime system cost, and value-added energy management features.
In explaining the basis for the contemplated finder's fee compensation, BMW stated as follows:
[E]MPS would engage BMW to assist them in the acquisition of funding for financing to fund the operations and development ofEMPS. BMW would be compensated upon the closing of the financing based upon a percentage of the amounts raised as provided in a Referral Fee Agreement between BMW and EMPS. A copy of the proposed Referral Fee Agreement ("Agreement") between BMW and EMPS is attached.
. . .
BMW's proposed role would be limited to the introduction of EMPS to a limited number of its contacts who may have an interest in providing funds for financing the operations and development of EMPS. BMW: (1) will not engage in any negotiations whatsoever on behalf of EMPS and any such contact; (2) will not provide any such contact with any information about EMPS which may be used as the basis for any negotiations for funding to be provided to EMPS;(3) will not have any responsibility for, nor make any recommendations concerning the terms, conditions, or provisions of any agreement between EMPS and any such contact providing funding for EMPS; (4) will not provide any assistance to any such contact or EMPS with respect to any transactions involving the financing of funds for EMPS.
Accordingly, in this instance it is respectfully submitted that the proposed payment of compensation to BMW in the context of the attached Agreement lacks traditional concerns. As stated, BMW's role is very limited and the potential for abusive sales practices is de minimis. BMW is looking for guidance from the Staff that the payment of a referral fee to BMW by EMPS would not place it in violation ofSection 15(a) of the Exchange Act. . .
[I]n your letter, you state that BMW would enter into an agreement with EMPS to help EMPS raise funds to finance its operations and development. Specifically, BMW would introduce to EMPS individuals and entities who "may have an interest" in providing financing to EMPS through investments in equity or debt instruments of EMPS. In return, EMPS would pay BMW an amount equal to a percentage of the gross amount EMPS raised as a result of BMW's introductions.
The Staff believes that the introduction to EMPS of only those persons with a potential interest in investing in EMPS's securities implies that BMW anticipates both "pre-screening" potential investors to determine their eligibility to purchase the securities, and "pre-selling" EMPS' s securities to gauge the investors' interest. Moreover, the Staff believes that the receipt of compensation directly tied to successful investments in EMPS's securities by investors introduced to EMPS by BMW (i.e., transaction-based compensation) would give BMW a "salesman's stake" in the proposed transactions and would create heightened incentive for BMW to engage in sales efforts. Accordingly, the Staff believes that your proposed activities would require broker-dealer registration.
Thus, based on the facts and representations set forth in your letter, the Staff is unable to assure you that it would not recommend enforcement action to the Commission if BMW engages in the activities set forth in your letter without registering as a brokerdealer pursuant to Section 15(b) of the Exchange Act. . .
Essentially, BMW represented that the law firm (not securities practitioners) would refer interested clients to an issuer but would not engage in a sales effort. The Division noted that the introduction of only those persons who had an interest in investing implies pre-screening and pre-selling, and gives BMW a "salesman's stake."
The Paul Anka No-Action Letter
In Paul Anka, 31 SEC No-Action Letter (July 24, 1991), the Division granted No-Action relief where a commission-like fee was involved, possibly because of the uniquely limited duties of the finder involved and the one-time occurrence of the event. In Anka, the Ottawa Senators Hockey Club retained entertainer Paul Anka to act as a finder for purchasers of limited partnership units issued by the Senators. Anka agreed to furnish the Senators with the names and telephone numbers of persons in the United States and Canada whom he believed might be interested in purchasing the limited partnership units. Anka would neither personally contact these persons nor make any recommendations to them regarding investments in the Senators.
In Mr. Anka's original proposal letter to the SEC, he would have made the initial contact with prospective investors, but the SEC would not issue a no-action letter under those facts. In exchange for his services, Anka would be paid a finder's fee equal to 10 percent of any sales traceable to his efforts. Important factors identified in the Anka letter include:
• Mr. Anka had a bona fide, pre-existing business or personal relationship with these prospective investors.
• He reasonably believed those investors to be accredited.
• He would not advertise, endorse or solicit investors.
• He would have no personal contact with prospective investors.
• Only officers and directors of the Senators would contact the potential investors.
• Compensation paid to the Senators' officers and directors would comply with 1934 Act Rule 3a4-1 (governing compensation to issuer's agents).
• He would not provide financing for any investors.
• He would not advise on valuation.
• He would not perform due diligence on the Senators' offering.
• He had never been a broker-dealer or registered representative of a broker-dealer.
See, Advisory Committee on Smaller Public Companies,Comments on Exposure Draft of Final Report and Written Statements Regarding Meeting on April 12, 2006, Report and Recommendations of the Task Force on Private Placement Broker-Dealers,see, Page 16 of the Report reprinted with permission from The Business Lawyer, May 2005, Volume 60, No.3. http://www.sec.gov/rules/other/265-23/gvniesar091205.pdf
Apparently, Anka resulted in a grant of No-Action consideration because the entertainer had a reasonable belief in the accredited investor status of his referrals but no personal contact with the investors. This would appear to distinguish Anka on the limited nature of his personal contacts, but there is no reference to Anka in the BMW Letter initiating query or the Division's denial. Based upon other statements by the staff, we think they have concluded that transaction-based alone requires Broker-Dealer registration. If that is the case, then the Division should state that directly. We respect the position but do not understand why it cannot be clarified.
A personal contact would appear to be as little as a country club discussion where the finder says to an affluent friend "I gave your name to someone with a good investment idea". Putting aside the difficulty in enforcing such a subjective test, the small business capital raising function should not depend on the continuing lack of clear and precise guidelines.
Small business should not have to hire lawyers to read through 30 years of letters as they struggle to survive. The Division should follow the recommendation of the SEC's Small Business Forum and ABA Task Force with regard to private placement brokers. http://www.sec.gov/info/smallbus/gbfor28.pdf (see Page 15 of the Report). This same recommendation has been made at the Forum every year in one form or another over the last 10 years.
Bill Singer's Comment: As Peter Chepucavage so aptly notes, not only are there compelling reasons to reform the ban against referral fees, but the initiative has been stalled for too many years. Nearly a decade ago, on September 24, 2001, I published an article in which, among other things, I stated:
Allow the Payment of Referral Fees to Non-Members
[B]Ds are frequently contacted by individuals and entities seeking to introduce a wide array of opportunities. Some of the introductions fall within the ambit of "deals," i.e., companies seeking to raise money through private placements or public offerings. Other situations involve the sale of customer accounts or leads concerning the availability of lucrative branch offices or BDs. As such, members are routinely contacted by non-members seeking to offer corporate finance deals, production, or customer accounts --- but usually these inquiries come with a price: the caller wants a referral fee or a percentage of the benefit bestowed.
For some reason you can pay referral or transaction-related fees to foreign entities but not to those in the U.S. Further, given today's economy and markets, many BDs would be more than willing to pay a referrer a percentage of whatever business is referred, be that a corporate finance fee or a portion of public customers' commissions. This is capitalization distilled to its essence --- the profit incentive.
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