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TN Founders using non-FINRA $-Finders may find SEC rules perplexing
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Particularly when friends and family support proves inadequate in the early-going, entrepreneurial founders are likely to need successive financings, for years on end.

The crushing difficulty of most early-stage founders' attempts to connect with money -- particularly smart money -- cannot be exaggerated.

Reaching out, often frantically, beyond their own personal, professional and community networks, many founders seek out and-or are pursued by potential investment Finders who accept assignments from business owners to secure investment capital or other financing.

Ideally, in keeping with the nation's laws and under the watchful gaze of the Securities and Exchange Commission (SEC), professional Finders are registered as broker-dealers with the self-regulating Financial Industry Regulatory Authority (FINRA). The SEC's Enforcement Division investigates securities laws violations and may report alleged breeches to state and federal prosecutors.

It's our understanding that most persons who earn their livelihood in part or whole by helping others buy or sell securities -- shares in startups, for example -- are required to become registered with FINRA.

With the rarest of exceptions, it seems, anyone who is not FINRA-registered when they serve as a Finder for multiple clients, may well be at risk of prosecution, with ensuing turmoil that could also directly affect founders and investors.

Our work covering the venture sector since 2003 -- first as publisher of News of Nashville Technology, and since 2008 via Venture Nashville -- has several times spurred us to take a closer look at these issues.

This has been something of a live ball for at least 20 years. Excellent recent offerings on the subject include those by attorneys at Akerman LLC (or, PDF download) and with Farrell Fritz, via NY Venture Hub.

Ron Geffner JD

Revisiting this subject recently, I was introduced to attorney Ron Geffner, who is a founding member of the executive committee of New York City-based Sadis & Goldberg.

At Sadis, Geffner oversees the financial services group. He began his legal career with the SEC in 1991, serving as staff attorney in the SEC Division of Enforcement's NYC Regional Office, where he focused on the prosecution of violations of the Investment Advisers Act of 1940 and the Investment Company Act of 1940. His firm bio here, his LinkedIn here.

In a brief interview for this story, Geffner made clear that it often seems to him that too many actors are "worrying too little" about risks of sanctions and-or prosecution that could result from working with finders who may not be properly registered.

Said Geffner, it's a mistake to rely wishfully on federal investigative capacity being focused elsewhere or on some illusory "forgiveness factor," rather than taking steps to ensure capital- or fund-raising activities are legal and compliant with regulations.

Next, I asked Geffner to comment on an exchange I recently had on this topic with staff of Tennessee Technology Development Corporation dba Launch Tennessee, which is a nonprofit, non-governing subsidiary of Tennessee Department of Economic and Community Development.

LaunchTN's institutional portfolio has since it became operational in 1998 spanned TNInvestco (a controversial improvement on CAPCOs), the U.S. Treasury and State-backed SSBCI 1.0 and SSBCI 2.0, as well as other entrepreneurial economic-development programs, some of which have provided dilutive or nondilutive grants, funding and other resources for expansion of Tennessee's entrepreneurial sector. LaunchTN is closely monitored on all fronts, is generally transparent and highly responsive, and is subject to state audits.

On June 11, VNC queried LaunchTN, which we understand has no FINRA-registered staff, asking "What steps do you take to ensure that, in the course of encouraging investment and capital formation, LaunchTN and its contract allies are not breaching related SEC or state securities laws and regulations related to its investor accreditation, fees paid to either FINRA-registered or un-registered persons or firms, etc.?"

Eller Kelliher

LaunchTN Chief Investment Officer Eller Mallchok Kelliher soon responded, "LaunchTN is not registered as a broker or dealer under federal or state law, and LaunchTN does not employ or affiliate with a registered broker-dealer. LaunchTN was created under state law to deploy federal and state funding into local early-stage and growth companies, and we do not hold ourselves out as providing any brokerage or dealer services to the public. In the ordinary course of our business, LaunchTN will purchase securities in companies in exchange for capital investments, but we do not regularly trade those securities or otherwise make a market for securities like a dealer. LaunchTN also does not actively solicit investors on behalf of companies that receive our funding."

Kelliher continued, saying, "LaunchTN may introduce companies to other investors with whom LaunchTN already has a pre-existing, substantive relationship (e.g., other angel investors who support LaunchTN's mission and goals). This practice, however, has been recognized by the Securities and Exchange Commission as permissible among networks of sophisticated investors since 2015. See Securities Act Rules, Compliance and Disclosure Interpretations, Question 256.27. Further, if LaunchTN makes an introduction to another investor within our network, LaunchTN does not (i) accept any fees or other compensation for such activity or (ii) act on behalf of the potential investor during the transaction, like a broker. Also, as part of the introduction, we only share factual business information about the issuer of the security and will not disseminate the type of information (e.g., financial information) that generally constitutes an offer of securities under applicable law."

Asked to comment on Kelliher's response, Geffner told VNC that Kelliher's statement suggests LaunchTN aims to operate in compliance with applicable law.

He then emphasized, "LaunchTN is making proprietary investments in return for the interest it receives and acknowledges that it does not accept any fees or other compensation for such activity. As a result, it is not engaging in a broker or dealer capacity. Finders, however, seek to be compensated in connection with an investment made by a third party to whom the finder has introduced the party accepting investment. The party accepting the investment is often structured as a limited liability company, limited partnership or corporation and the investor receives an interest in such entities that are securities as determined pursuant to the Howey test and the payment the finder receives is deemed to be a commission in connection with the sale of a security."

Note: Lest the reader think FINRA-related litigation is scarce, see notes under the Experience heading in this Baker Donelson search compendium, and this Broker-Dealer sort at Bass Berry.

Resource: BrokerCheck by FINRA. More on SEC. VNC

. last edited 26 June 2024 1700

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Tags: Akerman, capital, Eller Kelliher, Eller Mallchok Kelliher, Farrell Fritz, FINRA, Launch Tennessee, LaunchTN, Sadis, Sadis Goldberg, SEC, Securities and Exchange Commission, Tennessee Technology Development Corporation, TTDC


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