How ’bout that finder’s fee?
How ‘bout that finder’s fee?
The consequences of recent changes to finder’s fee arrangements
Woodbridge corporate and securities lawyer, Joseph Chiummiento, of Core Lawyers, discusses finder’s fee agreements, and how a verbal agreement was upheld by a Canadian Court leading to a large pay-day for a finder-turned employee / service provider to a public company.
In public markets, it is common for those helping to source funds for a private placement financing to request a finder’s fee, however, over the last several years, laws have changed to limit the ways in which finders can get paid a fee.
Can I pay a finder’s fee?
Navigating securities laws in Ontario and throughout Canada can be complex as each province has their own set of rules and laws when it comes to public companies. Over the last 15 years, the securities laws have become more aligned thanks to pivotal and international pressures after scandals such as those surrounding Bre-X Minerals and others.
Securities regulators in each of the provinces have collaborated at times or taken their cues from other jurisdictions that had implemented changes designed to protect investors and the public.
In order to pay a finder’s fee, some form of provincial registration is required, and in Ontario that usually means an Ontario Securities Commission or IIROC registration. Finder’s fees are payable to a non-registered person provided the payment is received from a registered person/firm – typically called a “broker” in Bay Street lingo.
A Verbal Agreement – Changes to Finder’s Fee Arrangements
An interesting case out of British Columbia may change that now, and involves Engold Mines Ltd. In 2010 an Engold executive said to a non-registered normal guy “find us some money and we’ll look after you.” The finder introduced the company to several potential investors but none of whom invested right away in Engold. The finder was later engaged by the company in an investor relations role through a third party, was paid a salary and received stock options. However, after completing a $1.8 million financing (with the finder’s contacts), the company refused to pay the finder a fee as verbally promised.
Lawyers for the company argued, the finder was not a registrant and therefore not entitled to be paid a finder’s fee under securities laws – or put differently, the company was effectively “barred” from paying a finder’s fee in this circumstance. The British Columbia Court of Appeal felt that such a technicality should not be the basis for denying the finder’s claim for payment, and considered whether the company made efforts to ask the Exchange for a “Waiver” in order to pay the finder. Interesting to note that the Exchange in British Columbia has discretion to “waive” the registration requirement when paying a finder’s fee to non-registrants.
Private Placements and Verbal Finder’s Fee Agreements
Simply put, watch what you say, the landscape seems to be changing slightly and if you speak to anyone remember that saying something like if you find us some money we’ll look after you” could cost you hundreds of thousands of dollars.
If you have any questions regarding finder’s fee agreements please feel free to contact me directly.