Broker Dealer Regulation for Your Own Deals
It's a long story about how I got to this point, so I'll keep it quick to save everyone time and get to the question.
Long story short, I've been given the opportunity by people in my network to work on deals independently. Usually, these are small deals (just a few million in enterprise value) that are being acquired by independent sponsors; the sellers of these companies are unsophisticated small business owners retiring out of their businesses. I have an independent sponsor who was introduced to me by someone in my network and he is acquiring a small IT services business (EV: 5.75mm, EBITDA: 2.1mm; deal structure: 70% cash at closing to the seller and 30% seller financing on second position). He was looking for someone to help raise the capital, so he and I came to an agreement that if I can raise the senior debt(about 2mm) and equity(about 600k) for the deal then he will pay me a success fee of 5% of all capital raised plus a warrant to buy 3% of his company. So far I've got to the deal out to dozens of SBICs and PEs that specialize in independent sponsor financing and some have even come back with terms sheets.
So to the question, can I collect these success fees if I'm not a registered broker-dealer (which is usually a placement agent requirement)? My understanding is that if you are what the SEC defines as a Tier 2 finder you are exempt from these requirements, but I'm curious how people in these forums are working on their own deals without having the backing of a broker-dealer.
Ah, the age-old question of broker-dealer regulations. It's a tricky one, but let's dive in.
Based on the most helpful WSO content, it seems that you're in a bit of a gray area. The SEC does have certain exemptions for what they call "finders," individuals who assist companies in finding investors. However, these exemptions are typically for those who perform limited activities and do not have a history of securities law violations.
The Tier 2 finder you mentioned is a relatively new concept introduced by the SEC. These finders can solicit investors on behalf of an issuer, but their activities are more limited than a registered broker-dealer. They can't negotiate terms, handle customer funds or securities, or be involved in the preparation of any sales materials, among other things.
Now, the tricky part is that the rules can vary by state, and some states may require finders to be licensed. Also, the SEC has been known to take a broad view of what constitutes broker activity, so there's a risk they could view your activities as requiring registration.
So, while it might be possible to collect these success fees without being a registered broker-dealer, it's a bit of a legal tightrope to walk. It would be wise to consult with a securities attorney to make sure you're not running afoul of any regulations.
Remember, I'm just a monkey with a knack for finance, not a lawyer. So take my advice with a grain of salt and consult with a professional. Keep swinging for those deals!
Sources: How to Start an Investment Bank/Brokerage Firm without Being a Licensed Broker?, Brokerage: Why not start your own firm?
No you legally cannot collect success fees that are a % of EV. Most people ik either are part of a broker dealer platform (there are pay to play ones) that takes a % of their deals or just works backwards into a “consulting fee” that fits the sale
The SEC recently codified an exemption. You might check and see if your involvement would fall under it. But don’t forget to check state regs to see if they also recognize the exemption.
https://www.clm.com/new-federal-exemption-for-ma-finders-and-brokers/
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