'Consultations' with LPs a source of risk

Private equity firms should be aware of unlicensed brokers when seeking investment opportunities.

Private equity firms that pay individuals or companies to meet US investors should ensure they are registered broker dealers or risk losing the investor's commitment, according to a client memo from law firm Tucker Ellis.

The risk has become more pronounced as of late as private equity firms look to broaden their base of investors to meet fundraising targets. 

Firms registered with the US Securities and Exchange Commission (SEC) should also be mindful that they must identify any third party agent or person hired to assist marketing efforts. “This disclosure requirement gives the SEC a tool to identify opportunities for enforcement efforts against the payment of finder fees to persons not licensed as broker-dealers,” the memo said. 

The memo warned GPs that even paying for an introduction or “consultation” with an investor could be captured by the broker-dealer law. Violators of the law risk losing out on LP commitments. 

Furthermore other investors compliant with the law could be on the hook for a commitment that resulted from an unregistered broker. Additionally, the SEC may issue a cease and desist order. 

Prior to 2010 the SEC took a more lenient approach to this rule and there was an informal practice that broker-dealer registration was not required for a finder simply introducing investors who was not connected to the sale of any securities, the memo said. But post-2010 the SEC has taken a more hard-line approach.