Posted on December 2, 2012
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Entrepreneurial companies must now consider a new regulatory risk when raising money for their businesses or negotiating an M&A transaction. Payment of finder’s fees to unregistered brokers could lead to corporate bankruptcy. It did so recently for a small biotech firm, Neogenix Oncology, Inc.
Federal and state laws mandate that professionals who arrange/negotiate capital investment or merger and acquisition transactions for a fee based on the success of their efforts must be registered as securities professionals. I decided when I got into the investment banking business in 1982 that, as expensive and time consuming as regulatory compliance might be, I would have to be registered. Our firm has chosen to incorporate its own broker dealer, but there are other options open to investment banking professionals.
It’s long been an open secret that some or perhaps even many business advisors have chosen a different path and raise money or negotiate M&A deals without registration. For many smaller intermediary firms, this has not posed a problem. Either their activities have not been noticed by the regulators or they are too small for anyone to care.
It now appears that the SEC may be using another approach to assure compliance – turn the accountants and lawyers into its policemen. In October 2011 Neogenix received a letter from the SEC requesting that the company “provide certain information relating to payments made to third parties (referred to as “finders’ fees”) in connection with the sales of the Company’s common stock”. Following up on the SEC inquiry Neogenix pursued an internal investigation and reported in its 10-K filed July 12, 2012.
“….. finders’ fees were paid to individuals and entities whom the Company has not been able to confirm were registered as broker-dealers or otherwise properly licensed under applicable state law to participate … read the rest
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