Texas Securities Commission
Adopts Limited Registration
For "Finders"

Overview
Effective September 1, 2006, the Texas Securities Board adopted a series of rules intended to encourage capital formation by creating a limited registration for persons acting as "Finders" in the state of Texas. The new rules target individuals who receive compensation for introducing an accredited investor to an issuer, or an issuer to an accredited investor, solely for the purpose of making a potential investment in the securities of the issuer.

Fundamentally, this is an attempt to balance the needs of the capital formation market against the Texas Securities Commission's intent to monitor and track those persons engaged in the capital formation process. With this in mind, the new rules focus primarily on individuals acting as Finders, who "introduce" and then "step away". Additionally, it is important to note that the rules are not exemptions from registration but, rather, provide for a limited registration.

Prohibited Activities
In addition to the limitations regarding accredited investor requirement as set forth in the rules, there are also significant activities in which a finder may not engage. Those activities include:(i) participating in the negotiation of any of the terms of the investment, (ii) giving advice to potential investors regarding the advantages or disadvantages of entering into the investment, (iii) conducting due diligence on behalf of a potential issuer or potential investor, (iv) providing valuation services, (v) providing other analysis to an accredited investor or an issuer regarding an investment, (vi) advertising to seek accredited investors or issuers, (vii) having custody of an accredited investor's funds or securities, (viii) serving as an escrow agent for the parties; or (ix) disclosing information to an accredited investor or to an issuer, other than the information allowed under the rules.

Disclosure Issues
The rules also contain disclosure requirements as well as limitations on what the Finder may disclose, and some limited recordkeeping requirements. The disclosures regarding the Finder must be in writing and must disclose to the investor that the Issuer is paying the Finder compensation. The disclosure must also state that the Finder cannot recommend or advise the investor with respect to the offering. Additionally, the Finder must disclose in writing any conflicts of interest that may exist. A finder may also provide to an accredited investor (i) the name, address, and telephone number of the issuer of the securities, (ii) the name, a brief description, and price (if known) of any security to be issued; (iii) a brief description of the business of the issuer in 25 words or less, (iv) the type, number, and aggregate amount of securities being offered; and or (v) the name, address, and telephone number of the person to contact for additional information. Additionally, a finder may provide contact information regarding an accredited investor to the issuer.

Recordkeeping and Supervision
While the recordkeeping requirements are substantially less than those of a broker/dealer or investment adviser registered pursuant to the Texas Securities Act, there are specific records that must be maintained. A finder must maintain a copy of the Form BD used to register the finder for a period of five years from the date of the termination of the finder's registration.

Additionally, a finder must maintain, for a period of five years, the following records related to transactions that have been completed and for which the finder has received compensation: (i) records of compensation received for acting as a finder, including the name of the payor, the date of payment, name of the issuer, and name of the accredited investor; (ii) copies of information provided by the finder to prospective accredited investors; (iii) any agreements or contracts between the finder and the accredited investor; (iv) any agreements or contracts between the finder and the issuer; (v) any lists of contacts/prospective accredited investors and or issuers; and (vi) any correspondence with accredited investors and or issuers. The finder may not commingle records and is required to know the location of any document that it is required to maintain. Those documents may be archived if they are more than two years old. Because, by definition, a finder is an individual who will not have agents, the finder is not required to maintain a supervisory system as provided under the Texas Securities Act, which sets forth supervisory requirements.

Registration Process
The Texas Securities Commission has attempted to make the registration process as streamlined as possible, while still allowing the state to know who is engaged in finder activities in Texas. Essentially, a finder is only required to complete a Form BD (as a sole proprietor) and provide a filing fee of $275.00. There are no exam requirements, and it is believed that the approval process should take approximately 14 to 30 days.

Summary
The new Finder rules mark a major step forward by the Texas Securities Commission to recognize and accommodate the role of "Finders" in the capital formation process. However, due to a number of factors, the rule changes are of limited benefit. First, the rules have not been structured to allow an individual to "engage" in the business of putting buyers and sellers together because they significantly restrict the disclosures that can be made regarding a transaction or issuer, and about the services and actions in which the finder can engage. Second, since the rule is based on Texas state law, it would apply only to finders in Texas. Finally, the rules regarding the ability of NASD member firms to pay a "registered" finder are still unclear.