SEC Proposes Conditional Exemption for Finders Assisting Small Businesses with Capital Raising
On October 7, 2020, the U.S. Securities and Exchange Commission (the “SEC”) voted to propose a new limited, conditional exemption from broker registration requirements for “finders” who assist issuers with raising capital in private markets from accredited investors. If adopted, the proposed exemption would permit natural persons to engage in certain limited activities involving accredited investors without registering with the SEC as brokers. Moreover, many existing registered broker-dealers could possibly withdraw their registration based on this proposed exemption. The proposed exemption seeks to assist small businesses to raise capital and to provide regulatory clarity to investors, issuers, and the finders who assist them.
The proposal would create two classes of finders, Tier I Finders and Tier II Finders The proposed exemption would also establish clear lanes for both registered broker activity and limited activity by finders that would be exempt from registration.
Tier I Finders:
Tier I Finders would be limited to providing contact information of potential investors in connection with only a single capital raising transaction by a single issuer in a twelve (12) month period. A Tier I Finder could not have any contact with a potential investor about the issuer.
Tier II Finders:
Tier II Finders could solicit investors on behalf of an issuer, but the solicitation-related activities would be limited to:
identifying, screening, and contacting potential investors;
distributing issuer offering materials to investors;
discussing issuer information included in any offering materials, provided that the Tier II Finder does not provide advice as to the valuation or advisability of the investment; and
arranging or participating in meetings with the issuer and investor.
Conditions for Both Tier I and Tier II Finders:
Both Tier I and Tier II Finders would be subject to certain conditions. The proposed exemption for Tier I and Tier II Finders would be available only where:
the issuer is not required to file reports under Section 13 or Section 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”);
the issuer is seeking to conduct the securities offering in reliance on an applicable exemption from registration under the Securities Act of 1933 (the “Act”);
the Finder does not engage in general solicitation;
the potential investor is an “accredited investor” as defined in Rule 501 of Regulation D under the Act or the Finder has a reasonable belief that the potential investor is an “accredited investor”;
the Finder provides services pursuant to a written agreement with the issuer that includes a description of the services provided and associated compensation;
the Finder is not an associated person of a broker-dealer; and
the Finder is not subject to statutory disqualification, as that term is defined in Section 3(a)(39) of the Exchange Act, at the time of his or her participation.
“Many small businesses face difficulties raising the capital that they need to grow and thrive, particularly when they are located in places that lack established, robust capital raising networks,” said Chairman Jay Clayton. “Particularly in these ecosystems, finders may play an important role in facilitating capital formation for smaller issuers. There has been significant uncertainty for years, however, about finders’ regulatory status, leading to many calls for Commission action, including from small business advocates, SEC advisory committees and the Department of the Treasury. If adopted, the proposed relief will bring clarity to finders’ regulatory status in a tailored manner that addresses the capital formation needs of certain smaller issuers while preserving investor protections.”
For any questions related to the above or any other regulatory concerns, please contact our broker-dealer regulatory partner, Daniel G. Viola.
