July 25, 2011

Capital Raising Using Unregistered Finders and Financial Consultants

Bloomberg Securities Law Report
Richard B. Hadlow

Public Companies and Securities Partner Richard Hadlow authored a Bloomberg Securities Law Report article titled "Capital Raising Using Unregistered Finders and Financial Consultants."

According to Mr. Hadlow, corporate clients generally are convinced that with sufficient funding their enterprises will succeed. Generally, enterprises learn that they first must raise additional capital from friends and family or angel investors, and that after this initial round of funding an investment banker is in a much better position to assist with obtaining capital from more traditional sources; however, if friends, family and angel funds are unavailable or inadequate, Mr. Hadlow writes that the entrepreneur often becomes desperate for funds and is susceptible to sales pitches from so-called "finders" or "financial consultants." These entities offer to raise capital for the enterprise in exchange for a percentage fee tied to the amount raised. The retainer agreement also frequently requires an upfront non-refundable "expense and due diligence deposit." Because of the severe ramifications of using an unregistered broker-dealer, according to Mr. Hadlow, counsel should review carefully any proposed participation of a finder or financial consultant in a transaction involving the sale of securities.

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