Can You Use Someone Who Isn’t a Registered Broker to Help Me Raise Capital?

Tackling a question that so often entices entrepreneurs – can I pay someone to help me find investors? When funding a new enterprise, how can a scrappy small business owner break into those upper echelons and c-suites where high-dollar investors are presumably just looking for the right start-up to fund – folks who would recognize the brilliance of your vision and gladly sink capital into your enterprise…if only they were aware of it!

It’s about at this point that many an entrepreneur remembers they have a rich relative, or a deep pocketed friend or business connection, or maybe just know a high roller that knows a bunch of other high rollers that can be convinced to invest. And this high roller – let’s call him Rich Uncle Pennybags – not only knows all the Sharks (see this post and this post by fellow entreVIEW authors if you’re interested in more about the “Tank”), he will be happy to find investors for you in exchange a fee that’s based on the amount of capital he successfully raises for you, so you’re not out of pocket one dollar! Brilliant, right?

And now we’re reached the point where the buzzkilling entrepreneur’s attorney weighs in – in most cases you can’t do this (well, at least legally anyway…). Unfortunately, Uncle Pennybags’ efforts would likely be deemed “broker-dealer activity”, which is subject to regulation and requires licensure.

Both federal (SEC) and state rules prohibit a person from acting as a “broker” unless that person is registered with the SEC and the state in which the person conducts business. A “broker” is defined as “any person engaged in the business of effecting transactions in securities for the account of others.” Unfortunately, the rules do not define what constitutes “effecting transactions in securities for the account of others,” but the SEC has identified certain activities that will generally be deemed to “effect” securities transactions, including:

• assisting in structuring a transaction,
• identifying potential purchasers,
• soliciting transactions,
• participating in taking orders for purchase of the subject securities,
• advising investors on the merits of the investment, or
• receiving commission or other transaction-based compensation in exchange for their services.

Well, so what if Uncle Pennybags just introduces you to potential investors? Unlike a broker, someone just acting as a “finder” does not need to be registered, although the line between “broker” activities and “finder” activities is at least a little blurry. In general, a “finder” is someone who merely provides a prospective investor’s contact information to the company that’s raising capital. But remember, by far the biggest red flag for securities regulators is the payment of commission-based compensation; that is, paying a fee based on the number of investors or a percentage of the amount of money invested. We here at entreVIEW urge caution if you want to go down the “finder” road – there’s a possibility it can be done, but only if you really pay close attention to the structure and compensatory arrangements.

Why should you care? You, the entrepreneur, are not the one engaging in unlicensed activity – isn’t that just a problem for Rich Uncle Pennybags? Unfortunately, no – the entrepreneur’s association with an unregistered broker in prohibited by state and federal law, violation of which can lead to fines, penalties, and sanctions. Worse, an investor whose investment was solicited by an unregistered broker may be able to force you to return any money invested. In addition, it could negatively impact your ability to raise future capital and or sell your Company in the future!!

If you still believe Uncle Pennybags and his rolodex can be really helpful, the safest thing to do is to try and work out a compensation arrangement that is not commission-based, such as a flat fee, and limiting his activities to only providing introductory information. And don’t forget other sources of funding that may be available to you—family, friends, and your own connections, small business loans or grants, angel investors, and crowdfunding platforms as discussed in this post.

One Toke Over the Line?

One Toke Over the Line?[1]

As the hazy post-legalization world of cannabis in Minnesota comes into focus—after it became legal to possess, use, and grow the plant on August 1, 2023—challenges and opportunities abound for business owners to take advantage of a new market worth potentially millions.

The trick will be figuring out how to turn the excitement into profits. Cultivators may learn that marijuana—like any cash crop—is subject to the same constraints and external variables that make agriculture an inherently difficult industry to master in general.

Keep that Bot out of your Boardroom

I regularly attend the Board meetings of the entrepreneurial companies I work with. I find it is a good way for me, as outside counsel, to stay abreast of the business’s strategies, key challenges, and opportunities. I also frequently serve as “Meeting Secretary,” keeping the minutes of the meeting.

At the risk of sounding too lawyerly, recording accurate minutes of Board meetings is one important part of maintaining good governance for your entity. This can be important for a variety of reasons, including holding officers and directors accountable for their actions and helping to prevent fraud and mismanagement, as well as mitigating risks of certain types of litigation, including corporate veil piercing.

The Power of Pink

A few weeks ago, I was able to catch a movie. I actually went to the movie theater. What movie caught my eye? What brought me out to a movie theater? You guessed it. The one and only – Barbie.

I had Barbies growing up, but I was not one of those fans who counted down the days until the movie’s release. In fact, I did not plan to watch it on the big screen, but the marketing team at Barbie had my social media buzzing.

The combined release of Barbie and Oppenheimer—dubbed “Barbenheimer”—became a pop culture sensation. There were memes left and right about Barbenheimer. The event possibly revived the movie theater industry. According to CNN, Barbenheimer led to the fourth highest-grossing industry weekend of all time in North America, totaling about $302 million.

Fairness and Moderation in Negotiations – You Have All the Power; Should You Use It?

I recently came across a LinkedIn post about the use of negotiation power. The post argued that even when you have all the leverage, you would be wise to think through crushing your opposition just because you can.

As an attorney, I certainly understand the logic in this because you won’t always have the upper hand and people tend to have very long memories when it comes to people that push hard just for the sake of pushing. I like to believe that on an individual level most other people also adhere to some sort of unwritten rule that a little bit of fairness goes a long way, but when you move up to the level of a business it seems like this unwritten fairness doctrine tends to quickly go by the wayside (and yes, to some extent, we the attorneys are likely to blame).

Philip Bump, The Aftermath: The Last Days of the Baby Boom and the Future of America (Viking, 2023)

I write this sitting in front of a window open on a fine summer’s morning. On any other day, I’d be in an equally fine mood, but today I find my internet connection has suddenly gone missing and, after seven hours on the phone with my “helpful” ISP, I am still accessing the online world through a supremely unstable iPhone hotspot. Insert “OK, Boomer” comment here.

Yes, this is a first-world problem, but it’s one problem those of us in the Boomer generation would never have anticipated—let alone imagined—30 years ago. It is a problem, as Bump argues here in this biography of my generation, that arises from the shift in society’s focus away from us old-timers. “Younger Americans,” he writes, “now dominate a cultural conversation that often depends on the sort of technologies that have emerged only relatively recently.”

Growing an Entrepreneur Farmer

Today I’d like to share an unusual and inspiring story of entrepreneurial spirit, originality, creativity, and, perhaps most important, perseverance.

Scottie Thelman grew up in Lawrence, Kansas, the son of a doctor and a minister. Although Lawrence is a smallish town (and home of the 2022 NCAA Champion Jayhawks – just sayin’), it’s not a completely rural community. Lots of wheat and other fields around, however, and Scottie was originally inspired to focus on the business side of agriculture.