Using Finders to Raise Funds: the Securities Laws Issues

For every venture capital deal that’s completed, there are 10-20 angels/friends and family financings done. In my view, there is a model way (using model documents) to do these deals, regardless of who your backers are and whether you ultimately seek venture capital. This week, my posts are going to focus on common issues in completing these deals.

Issue 1: The finder. More and more, early stage companies are using self-styled consultants, or financial advisors, to help them find investors. These consultants typically create the pitch slide deck, shape the business plan and even negotiate and structure the investment terms. In return, the consultant is paid a success fee based on the amount of money raised, or a combination fee plus fixed consulting fee.

The potential problem? Applicable securities laws may deem this consultant to be an unregistered broker-dealer. In which case, you may be liable for fees and penalties under securities laws for completing a financing that was not compliant with private placement exemptions. There’s a great analysis of this issue under US Securities laws here, on the website of investment bankers Carter, Morse & Mathias.

In Canada, there is a second issue: the angel manager. Some formal angel alliances have managing angels who, in exchange for their services to startups, command a fee from the investee. How do/might these fees impact your ability to raise future funding? This is a moving target to watch - in the last twelve months, the OSC has clearly been focusing its attention on small and madcap markets.

The bottom line: make sure your lawyer understands that you have a "consultant" on your team helping you raise funds. Ask her to specifically advise you on this issue. The landscape is changing, and you need to flag it for your lawyer's consideration.