My lawyers tell me the Lehman Formula should only be used for broker-dealers. Yet, I'm encountering a number of people in my tangential network who want to compensated if their contacts end up investing, including one gentleman's who's an attorney. My attorneys are uncomfortable offering a template for this. Has anyone here used one? Would they mind sharing, maybe outside of this forum?
please keep in mind that it's illegal (violation of securities laws) to pay a finders fee/commission which is contingent upon the amount of money raised (debt or equity) unless the recipient of the fee is FINRA registered as a broker/dealer.
Dear Anonymous... There are a great deal of smart and experienced entrepreneurs and executives here. You never know who could help you.. Being anonymous doesn't help you.. business is a contact sport.
It is not that your lawyers were uncomfortable with the template. They didn't want to participate in your plan that would almost certainly violate state and federal law.
Here is the deal. You need to be licensed to accept a commission for raising money. You need to be licensed federally and licensed in each applicable state. This is not easy or cheap to do.
There is a very very very narrow exception for what are called "finders fees" under federal law and under some state laws. Without a lawyer at your elbow at all times you will almost certainly violate these state and federal exceptions and/or take fees in states that outright prohibit it.
Now it appears that what you want to do is to pay the finders fee. As I am writing this, I frankly don't know what your exposure is as the party paying the fee. There may not be any. It most likely may vary from state to state.
Personally, I would be suspicious that anyone asking for a finders fee, is likely inexperienced with this particular activity and will likely be a waste of time. Most investors don't like finders fees and typically require a representation by your that you are not paying any finders fees.
If a finder really has a relationship with an investor, they will find a way to be taken care of by that investor.
The Lehman Formula is (as Mr. Lipper noted) for business brokerage, mergers, acquisitions, or other advisory services. This type of sliding scale is NOT used by investment banks for securities underwriting or capital raising transactions, at least not in the twelve years I was in the business (including four years at Lehman).
In addition to the points raised by others, there can be issues with the states. Specifically, using an unlicensed broker-dealer opens up a "right of rescission" for the purchaser, whereby they can recover their initial investment with interest!
Such a liability would cause any future funding source to shy away - quickly.
Note that the template Mr. Deluca shared is from the provider of capital POV. NOT the startup looking for money. That is a critically important differentiation in applying Federal and State Securities Statutes to the reverse scenario you asked about.
I strongly advise against pursuing funding from people pitching this fee arrangement. If they don't have a sound legal template with a legal opinion letter available and blessed by your attorney satisfactorily addressing compliance issues then don't walk, run away.
Use with caution - There are ways to re-gig this doc so you are not braking securities laws.. Mortgage laws... banking laws... http://www.archadvisors.com/webdocs/Finders-Fee-Agreement-Lehman-Formula.pdf
Patrick is 100% correct. I have raised money in the past and have done it 100% ON SIDE with my Securities Law firm in tow and I can tell you from experience that anything and anyone can trigger the SEC or in Ontario Canada the OSE.. and even when you are doing it all right be ready to defend your raise.. I have learned this " Cheap is very expensive".
The Lehman Formula or any other formula for finder's fees which varies depending upon the amount of investment funds raised should only be used to compensate a registered securities broker-dealer. If the person who wants a "finder's fee" is not registered as a broker-dealer, the entity which is raising capital should pay a flat fee negotiated before the assistance is provided which does not vary based on the amount of funding which is raised.