Woodbridge corporate and securities lawyer, Joseph Chiummiento, of Core Lawyers, provides insight on whether to pay finder’s fees to non-registered individuals.

In the early stages of growth of your business, the need for investment capital can sometimes come with requests to pay finders fees on successful capital raises. Careful consideration should be given to ensure liability does not fall upon management teams as the old adage of “ignorance of the law is no excuse” still applies, and the mindset of “you should have known better” persists in hindsight.  

Who can you pay finder’s fees?

Can I pay finder’s fees for a capital raise?

The short answer is yes, but it “depends”.  The more detailed answer includes asking the following questions:

• Is the person requesting a finder’s fee engaged, or holding themselves out to be engaged, in the business of trading securities
• Are they acting like a broker and being an intermediary between investors and companies looking to raise money
• Are they paid or do they make any compensation from trades in securities or are they offering, pitching or trying to help sell securities/shares of other companies.

The bottom line is that if they are in the business of making money by introducing, selling or promoting securities (ie. selling shares, options, warrants, convertible debentures etc…) they are required to register with the relevant regulatory authorities – in Ontario it is the Ontario Securities Commission.  Regulators in each province where money is raised (ie. wherever an investor lives) will look at all the facts and history and determine if someone is in the “business” of making money as a broker/dealer would.

When could I pay an individual a finders fee?

There is some support for the notion that a one-off finder’s fee payment can be made.  This means that an individual who has never received a finder’s fee in the past and is not in the business of making money through activities associated with buying or selling securities (stock, bonds, debentures, options warrants etc…) can be paid a finders fee.

Each situation and all of the facts associated with the finder should be carefully considered, and a responsible management team would want to ask these (and other) questions:

• What does the finder do for a living?
• Where does he or she work or earn a living
• Has the finder received a finders fee in the past 5 years related to the sale or purchase of securities?
• Is the finders fee being requested as an advisory services fee or success fee or consulting fee to hide the fact that it is a finders fee (walks, talks and looks like a duck but really is a chicken analogy)

What happens if we pay finder’s fees and the regulators find out?

Generally, regulators will review transactions either ad hoc or upon receiving a complaint or learning of a complaint (through the media).  Once enforcement divisions get involved your stock will be halted (if you are public) and a thorough investigation will begin where every detail of your corporate governance, management team work history and stock trades (whether in this company or others) will be looked at.  If a decision is made to take enforcement action against you the consequences can include: fines, jail time, orders not to be involved in public company boards, and other dire consequences.

More importantly, your reputation will be forever marked when submitting Personal Information Forms (for the TSX) or other similar disclosure forms for directors and officers of public companies which could cause considerable embarrassment.  This applies to all of your board members and officers ongoing record with regulators and securities exchanges, so any decision to deal with an un-registered deal/broker should be carefully considered.

Care should be given to draft reps and warranties as well as indemnities into any finders fee agreements to ensure protections are in place for Companies, Management and Board of Directors.

Should you have any questions regarding who you can pay finder’s fees please feel free to contact me directly.