This question was asked by Scott B. at ExitPromise.com
I am semi-retired from the transportation sector. I have a business friend that owns a transportation company with approximately $100 mm in annual revenue that he would like to sell – retire himself. He would like me to connect him with a private equity group that would be interested in acquiring his company and prefers I be paid a “Finder Fee” by the acquiring PE firm, at closing. I know of a couple PE Firms that may be interested in this business. So my questions: (1) Are PE Firms allowed by law to pay an individual a finder fee on a deal that was referred to the PE firm by the individual and subsequently acquired by the PE firm? (2) Are there any licenses or other requirements the individual (me) must possess/meet to lawfully act and be paid in this “Finders” capacity? Thank you in advanced for your response.
Hey Scott, you’ve asked an interesting question that cannot be properly answered without really looking at the facts of the matter.
However,here are a couple guidelines, not to be taken as the legal advice.
First, the typically well-organized private equity firm is prepared to pay finder’s fees to unregistered parties, and its compliance team has developed processes to avoid running afoul of FINRA’s securities laws.
FINRA Rule 2040 governs the payment of transaction-based compensation by member firms to unregistered persons.
Second, firms is limited to whom they may pay a commission (i.e. a percentage of transaction payable upon closing), and if its unsure, will err on the side of precedent, in the form of
- previously published no-action letters or interpretations from the SEC; or,
- seeking a response from the SEC; or
- obtaining a legal opinion from independent, reputable U.S. licensed counsel knowledgeable in the area.
Finally, take a look into broker-dealer licenses and the exemptions, which involve both state and federal securities laws. This involves multiple steps, and must be done with the guidance of legal counsel, especially one that it’s familiar with securities laws.