Questions about the use of finders have bedeviled transactional lawyers for years. The need for finders is the unintended consequence of the federal and state securities law exemptions that are conditioned on the absence of a general solicitation. Most start-ups don’t have preexisting relationships with rich people (aka accredited investors). Thus, they are sorely tempted to hire someone who knows, or claims to know, potential investors. One of the many questions raised by the use of finders is whether they must be registered under federal and/or state law as brokers or broker-dealers.
Now, Assembly Member Donald P. Wagner is proposing to address the licensing question head on. His bill, AB 713, would exclude from the definition of “broker-dealer” an individual who meets a new statutory definition of “finder” and satisfies numerous other conditions. The bill defines a “finder” as an individual who introduces or refers one or more accredited investors to an issuer or an issuer to one or more accredited investors, solely for the purpose of a potential investment in the securities of the issuer, and who does not:
- participate in negotiating any of the terms of the investment;
- advise any party to the securities transaction regarding the merits of, or the advantages or disadvantages of entering into the investment; or
- sell or intend to sell any securities of the issuer, which securities are owned, directly or indirectly, by the finder as a part of the investment.
In addition, a finder must meet six additional conditions, including filing an initial statement of information with the Department of Business Oversight (fka Department of Corporations) and paying a fee.
Many will undoubtedly welcome this effort to regularize an activity that is widespread but not necessarily legal. The bill, of course, does not address the status of finders under the Securities Exchange Act of 1934.
Coincidentally, California’s motto is “Eureka!” which is the English transliteration of the Greek word, εὕρηκα. Eureka means “I have found it”. For the last two millenia, the word has been associated with Archimedes. According to Vitruvius Pollio, the new king of Syracuse ordered a golden crown made and provided the necessary gold. After the crown had been made, the king decided that he had been tricked as the gold had been adulterated. The crown weighed the same as the gold that the king had provided, but was the crown 100% gold? Crown in hand, the king went to Archimedes who quite naturally took the crown to his bath. After all, what else would you do if a king brought you a golden crown and asked you to check it out?
Here, I’ll pick up the story according to Pollio:
casu venit in balineum, ibique cum in solium descenderet, animadvertit, quantum corporis sui in eo insideret, tantum aquae extra solium effluere. idque cum eius rei rationem explicationis ostendisset, non est moratus, sed exsiluit gaudio motus de solio et nudus vadens domum universis significabat clara voce invenisse, quod quaereret; nam currens identidem graece clamabat εὕρηκα εὕρηκα.
By chance [Archimedes] came to the bath, when he was descending into the tub, he thought as much as his body sank into the tub, so much water flowed out of the tub. Since this demonstrated the reason of the matter, he did not delay, but leaped from the tub shaking with joy and going home naked he was making known to all with a clear voice that he found what he was seeking, for running he was shouting again and again in Greek, “Eureka, Eureka”.
Vitruvius Pollio, De Architectura, Book IX, Introduction, § 9 [my translation]. The mental picture of a naked Greek polymath running through the streets of Syracuse shouting “I’ve found it!” is so vivid that it lives on in popular culture. Some have questioned whether the event occurred because Archimedes didn’t write about it and Pollio wrote his book two centuries later. Others question the story on scientific grounds. Pollio, like Archimedes, may be all wet and exposed, but at least he told a memorable tale.