A "finder" is a loosely defined term for an unregistered intermediary who helps arrange private placements. Finders bring investors and issuers together using their contact lists, but their services are limited; unlike full service broker-dealers, they do not deal in retail trades, underwrite flotations, handle customer calls, publish analysis or manage investments under federal and/or state laws.

However, finders' activities often fall within the Securities and Exchange Commission staff's interpretation of the definition of a broker-dealer in Section 15 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), which requires all persons in the business of effecting transactions in securities to register with the SEC. Using an unregistered broker to facilitate a deal poses significant risks to all parties involved.

Over the past few years, these risks have increased and have now, apparently, reached an inflection point. The three major issues that can arise from using an unregistered broker are: (i) the contract between the unregistered agent and the issuer can be declared void, (ii) the unregistered agent may face regulatory action by the SEC and state authorities and (iii) the issuer may face private actions by investors seeking to rescind their purchases and recover their investments. While the first two issues have been widely recognized, the third issue raises new, unanswered questions that are ripe for discussion.

Advice from regulators and recent court decisions can be read to suggest that the use of unregistered brokers will cause the company to be liable as aiders and abettors of securities laws violations under Section 20(e) and 29(b) of the Exchange Act. Additionally, Form D has for some time required disclosure of the name and CRD number of any person who was paid a fee in connection with the sale of securities, enabling the SEC and state regulators to easily track the use of unregistered brokers; the latest change is that Form D must now be filed online, meaning in turn that all hands, including regulators and potential plaintiffs, can have a bird's-eye view.

In the current economic climate, disappointed investors have increased incentives to bring private actions against issuers to rescind their investments based on a violation of 29(b) of the Exchange Act, arguing the issuer was complicit in the unregistered broker's statutory violation. The broad language of 29(b), along with the three-year statute of limitations, creates a window for unsatisfied investors to discover the use of an unregistered broker and rescind their contracts and recover their funds by unwinding the purchase of securities placed by an unregistered person or entity.

Recent SEC enforcement of broker registration raises the intensity of this issue, and the Financial Industry Regulatory Authority has proposed rule 2040, which also addresses payments to unregistered persons. In addition, there has been proposed legislation that would overturn the effects of both Central Bank of Denver NA v. First Interstate Bank of Denver NA, 511 U.S. 164, 191 (1994) and Stoneridge Investment Partners LLC v. Scientific-Atlanta Inc., 552 U.S. 148, 159 (2008). The proposed legislation would extend liability to those who aid and abet violations of securities laws, (who previously did not fall within §10(b)) by amending the Exchange Act to authorize a private right of action for aiding-and-abetting liability. Senator Christopher Dodd, D-Conn., has proposed a similar amendment to the Exchange Act as part of the Restoring American Financial Stability Act of 2009, which would also allow plaintiffs to pursue secondary actors. Each bill can be seen as an implication that the current climate may be ripe for a judge or jury to find for a plaintiff and award rescissionary damages in a case where an issuer knowingly hired and used an unregistered finder.

Furthermore, state securities laws grant investors additional rights. For example, in California, Section 25501.5 of the Corporate Securities Law provides, in part, that a person who purchases a security from or sells a security to a broker-dealer required to be licensed but which has not, at the time of the sale or purchase, secured from the commissioner a certificate authorizing the broker-dealer to act in that capacity, may bring an action for rescission of the sale or purchase or, if the plaintiff or the defendant no longer owns the security, for damages. In fact, six state statutes contain voidability provisions, all of which specifically give a right of rescission to the buyer. Four states make any sale made in violation of any provision of the Blue Sky statutes voidable. Arizona limits its voidability provision to the sale of unregistered securities, transactions by unregistered dealers or specified fraudulent practices; Florida and Illinois grant rescission as a remedy to a violation of registration provisions of the securities dealer, associated person and investment adviser.

The growing risks have been highlighted in a series of articles published in VC Experts Buzz of the Week (http://vcexperts.com/vce) written by Sullivan & Worcester LLP of counsel Joseph Bartlett, a member of the American Bar Association Task Force on Private Placement Broker-Dealers. The articles trace a number of events, culminating in the current status, whereby the SEC and state securities regulators are closely monitoring the activities of non-exempt unregistered brokers and are no longer turning a blind eye to their activities. These actions are sometimes connected to the "pay to play" scandals in New York, New Mexico and Illinois, which have highlighted the need for finders to be regulated in order to protect investors' interests.

Is rescission the appropriate remedy for a violation under 29(b)? The absence of case law on this issue could be interpreted to mean that the use of an unregistered broker, unaccompanied by fraud, does not directly trigger rescission rights. On the other hand, the topic of unregistered broker-dealers has been attracting attention in a variety of ways recently: the pay-to-play scandals have increased awareness of the negative effects of unregistered finders; the requirement of a CRD number on Form D facilitates enforcement; and the SEC's enforcement proceedings demonstrate an increased push to enforce registration requirements. The lack of precedent may merely reflect that the tipping point has not yet been reached, but the current environment is ripe for a judge or jury to see the violation under a new light and award rescissionary damages to misled investors.

Joseph W. Bartlett, of counsel in Sullivan & Worcester's New York office, is a member of the corporate department. Rachael E. O'Beirne is a real estate associate in the firm's Boston office. Jonathan G. Kortmansky is a New York-based partner in the firm's litigation practice.