Beware the Venture Catalyst
Heard about venture catalysts? These newfangled matchmakers may have great connections to angel investors and venture capitalists, but they may also be breaking the law.
So warns Cynthia Sadick, a former counsel for the National Association of Securities Dealers and a partner at Sadick & O'Brien, in Boulder, Colo. Making introductions is one thing, says Sadick, but "we're running into quite a few situations where venture catalysts and money finders are out there negotiating deals for companies and getting paid for the transaction without knowing the securities laws."
The problem: the matchmakers are not broker-dealers. Basically, under the Securities Exchange Act of 1934, any person who negotiates the sale of stock and receives a percentage of the transaction as payment must be a registered broker-dealer. Those running afoul of the broker-dealer requirement are often "neophytes, investment-banker wanna-bes," says Sadick. But some violators are also experienced moneymen. The most famous: Michael Milken, who, even after he was barred from securities trading, negotiated a deal for which he received $42 million. In 1998 he was forced to give it all back with interest.
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