Searchers paying finder's fees to other searchers: legal gray area or fine?

July 26, 2021

by a searcher from Harvard University in Boulder, CO, USA

I really like the idea of searchers offering deals they passed on to the broader community. This can be very valuable to a fellow searcher particularly when the deal is proprietary. I often have to say no to companies that other folks might love (e.g. companies dependent on veteran-owned small business set-asides but I'm not a veteran).

I think it makes sense to have a finder's fee arrangement in such a situation, mainly to incentivize folks to take the time required to pitch an opportunity to the community and then craft / coordinate a warm intro. My understanding is that paying this fee only on successful close is the norm because a) most searchers are cash-poor and b) the opportunity is only lightly due-diligenced at this point so could easily be a dead end, and therefore paying for it before closing/due diligence seems unfair.

So far I've signed 2 such finder's fee agreements to get company information, and have offered one deal myself.

My concern: a contact of mine raised a red flag that paying transaction-based compensation is a hallmark of broker-dealers (based on SEC guidance) and therefore it is important to only enter into such contracts with registered brokers.

If this is the case, doing a searcher->searcher finder's fee arrangement is .... not enforceable? A bad idea? Not sure. Do others have experience with this / perspectives on this?

Reply by a professional
from Fordham University in Houston, TX, USA

Hi Kendall, for an asset sale, paying a finders fee is generally not a problem. If the transaction is structured as an equity deal, then the terms of the deal and your involvement in it must fit certain criteria, known as the M&A brokers exemption. You can find the list in the SEC no-action letter: https://www.sec.gov/divisions/marketreg/mr-noaction/2014/ma-brokers###-###-#### pdf, but you should consult an attorney before entering into any arrangement to make sure you would be properly relying on that exemption.

Reply by an investor
from University of California, Berkeley in Bend, OR, USA

I don't think it's a legal gray area. To answer Patrick's question, I've seen quite a few "finders" asking for a fee using the Lehman formula, which on a deal we were looking at worked out to just over 1.5%. That said, I hope Searchfunder.com doesn't become a community of finders fees. The search fund I intern for has passed dozens of deals along to our fellow searchers simply because it didn't work for us any maybe it will work for someone else. Also, there is a veteran's mastermind group on here where deals get passed along continuously, with no other motive. Just my two cents.

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