A CFO's Guide to Disclosing Finder Fees in Financial Statements

Finder fees are a common practice in the financing landscape, especially for public companies seeking to raise capital. However, they’re not just about facilitating investments; they bring additional responsibilities, especially for Chief Financial Officers (CFOs).

For CFOs tasked with compliance and financial transparency, understanding the protocols surrounding finder fees is critical. This article will explain what finder fees are, the regulations that govern their disclosure, and how they should be reported in financial statements. By the end, you will have a thorough understanding of how to handle finder fees while remaining compliant and safeguarding your company’s integrity.

What are Finder Fees?

Finder fees involve a payment made by a reporting issuer to an investor or a brokerage firm to reward them for bringing new capital into the company. Simply put, these fees serve as an incentive for individuals or firms to assist in securing investments, often through private placements.

A Typical Breakdown of Finder Fees

• Cash Payment: Companies often compensate brokers or lenders with a cash fee as a percentage of the raised capital.

• Finder Warrants or Options: Alternatively, or additionally, companies offer other types of remuneration like warrants or options, granting the recipient the right to purchase shares at a future date, often at a set price.

Such payments function as compensation for efforts undertaken to acquire investments, but they come with regulatory requirements that the company—and its CFO—must comply to.

Why Finder Fee Disclosures Matter

Finder fees are integral in raising capital, yet transparency is just as important. For public companies, failure to disclose the payment of finder fees appropriately can lead to compliance risks and potential backlash from regulators and investors.

CFOs must ensure that these transactions are accurately captured and reported in a company’s financial statements and Management Discussion & Analysis (MD&A). The goal is to eliminate any ambiguity regarding how these fees were paid and to whom they were distributed.

Key Reporting Regulations

• Transparency Mandates: Disclosure of finder fees reflects a company’s commitment to transparency and enhances investor confidence.

• Regulatory Oversight: Public companies operate in tightly regulated environments, often requiring full disclosure of key management transactions and related-party dealings. This oversight ensures that companies remain accountable and fully transparent with stakeholders

Types of Finder Fees and their Reporting

Finder fees are not a one-size-fits-all concept. Companies can structure them in various forms, including cash, issued shares, or warrants. Regardless of the format, thorough disclosure is mandatory. Below are the types of finder fees and the specific reporting considerations for each.

Finder Fees Paid in Cash

Cash payments for finder fees are perhaps the most straightforward, but they must still be disclosed properly under key management compensation or related-party transactions in financial statements.

Equity-Based Finder Fees

Finder fees are often paid in the form of warrants, options, or shares. These equity-based fees may also have long-term financial implications, such as potential dilution of shareholder equity when warrants are exercised.

CFOs must disclose these fees in share capital notes, including details about issuance, exercise, and fair value at the time of grant. Non-cash working capital notes and supplemental cash flow information can also provide insight into the future value of these transactions, ensuring investors have a complete picture.

Key Considerations for Smaller Public Companies

Finder fees often play a significant role in smaller public companies, where the capital table is small, and arrangements may involve key management or major shareholders. However, this can introduce a layer of complexity, particularly when related-party transactions are involved.

Required Disclosures in Financial Reports

Finder fees involving management or major shareholders fall under related-party transactions and must be disclosed in a transparent manner. CFOs should ensure these fees are documented in the appropriate financial statement notes, including the following sections when applicable:

• Key Management Compensation: Highlight remuneration paid to individuals responsible for key financial or operational decisions.

• Related Party Transactions: Detail transactions where significant shareholders or management benefited from finder fees.

• Share Capital: Document share- or warrant-based compensation, including issuance, exercise, and expiration details.

• Non-Cash Working Capital and Supplemental Cash Flow: Include adjustments for the expected financial impact of non-cash-related finder fees, such as options or warrants that have not yet been exercised.

• Subsequent Events: If relevant finder fee events occur after the reporting period, they should be included in this note to maintain transparency.

How CFOs can manage Finder Fee compliance

Disclosing finder fees requires a methodical and detail-oriented approach. Here’s how CFOs can ensure they’re covering all bases while positioning the company for compliance success.

Establish Clear Protocols

Work closely with legal and compliance teams to establish clear reporting protocols for finder fees. These protocols should outline when and how fees are disclosed, ensuring alignment with all regulatory requirements.

Foster Transparent Communication

Maintain open communication with external auditors, board members, and investors. This fosters trust and ensures alignment on how finder fees are tracked and reported.

Leverage Professional Accounting Systems

Adopt robust accounting software that can help track finder fee transactions and generate accurate disclosures as part of financial reporting processes. Automation can simplify tasks like valuing warrants or forecasting dilution impacts.

Regular Training and Updates

Given the evolving nature of regulations, CFOs should stay informed regarding compliance updates and ensure finance teams are adequately trained. Subscribing to updates from regulatory agencies or hiring specialized consultants can also be valuable.

Ensuring Financial Integrity with Finder Fee Disclosures

For CFOs, properly managing and disclosing finder fees builds credibility with regulators and investors alike. It not only demonstrates financial integrity but also shields the company from compliance risks. By adhering to disclosure requirements and maintaining transparency in how finder fees are paid and reported, you set the stage for investor confidence and long-term growth. With this guide, CFOs can confidently tackle finder fee compliance and reporting challenges head-on.

Would you like to streamline your company’s financial processes and enhance compliance? Contact Strategize to explore how our fractional CFO and advisory services can support your needs.

The Role of Auditors in Finder Fee Compliance

Auditors play a crucial role in ensuring the accuracy and completeness of finder fee disclosures. Their expertise helps validate that reported transactions align with regulatory requirements and accurately reflect the financial health of the company. During audits, particular attention is given to identifying any potential gaps or irregularities in finder fee disclosures to prevent reputational and compliance risks.

Key Audit Procedures for Finder Fees

Auditors typically apply several procedures to assess the treatment and reporting of finder fees. These include:

• Reviewing Supporting Documentation: Auditors examine agreements, contracts, and transaction records to confirm the validity and classification of finder fees.

• Evaluating Fair Value Measurements: For equity-based finder fees, auditors assess the accuracy of fair value calculations at issuance and subsequent reporting periods.

• Inspecting Related-Party Transactions: Special scrutiny is given to transactions involving management or significant shareholders to ensure compliance with disclosure standards.

• Assessing Internal Controls: Auditors evaluate the effectiveness of internal financial controls to ensure that finder fees are correctly recorded and disclosed.

• Confirming Subsequent Events: Transactions occurring after the reporting period are reviewed to ensure they are properly disclosed in financial statements as necessary.

Collaborating with Management

A successful audit requires collaboration between the finance team and auditors. CFOs and their teams should prepare comprehensive documentation and maintain open lines of communication. Preemptively addressing potential concerns ensures a smoother audit process and reinforces the company’s commitment to transparency and compliance.

Consequences of Non-Compliance

Failure to properly disclose finder fees can lead to severe repercussions, ranging from financial penalties to reputational damage. Regulatory agencies may impose fines or initiate investigations if the required disclosures are incomplete or inaccurate. Additionally, non-compliance can erode investor trust, adversely affecting the company’s ability to attract capital or negotiate future deals.

Proactively adhering to disclosure requirements not only protects the company from these risks but also fosters stronger relationships with stakeholders. Transparency in financial reporting strengthens credibility, paving the way for sustainable growth and success in a competitive marketplace.

Leveraging Expert Guidance

CFOs managing complex finder fee scenarios can benefit significantly from expert advisory services. Consultants specializing in financial compliance or legal matters can offer guidance tailored to your company’s specific circumstances. Engaging external expertise can also help streamline reporting processes, optimize disclosure protocols, and mitigate potential risks before they arise.

At Strategize, we understand the challenges associated with finder fee disclosures and broader financial compliance. Our team of experienced professionals is here to help you meet regulatory demands with confidence while positioning your company for long-term success. Reach out to us today to learn more about how we can support your financial goals.