Issues Involving "Finders" And Other Intermediaries In Private Placements Following SEC Repeal Of General Solicitation Ban

by Pierce Atwood LLP
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Portland, ME

The imminent repeal of the SEC’s long standing prohibition on general solicitation in private placements conducted under Regulation D (provided that only accredited investors purchase securities in such a transaction) presents a significant new opportunity for brokers, finders and other intermediaries to play an expanded role in private placement transactions. Historically, there have been concerns about the point at which one crosses the line into prohibited general solicitation activities in a Regulation D offering when empowering an intermediary to generate accredited investors sufficient to complete an offering, thus leading some issuers and their counsel to avoid such risks.

With that concern removed, it is foreseeable that many intermediaries will seek to expand their roles in the private placement arena, with corresponding potential benefits for issuers seeking capital. In this context, issuers should remain cautious with respect to securities law compliance in the realm of broker dealer regulation. Utilizing a finder or other intermediary that is not a registered broker dealer in a private placement, particularly involving the payment of success based or other transaction specific compensation for delivering accredited investors who invest in the offering, not only exposes the intermediary to potential liability for acting as an unregistered broker dealer, but also could result in the investors having a right to rescind the transaction (enforceable against the issuer and, in some cases, its principal(s) personally), despite the transaction’s compliance with Regulation D and the absence of any disclosure deficiency, with potentially disastrous consequences for the issuer and its principals.

Although SEC no action letters and other interpretive guidance have granted exemptions to unregistered intermediaries in the past, these have been few in number and based on unusual or limited facts. In recent years, the SEC appears to have backed away from some of its earlier, more liberal exemptive interpretations. Widely voiced concerns about investor protection in the wake of the general solicitation ban repeal appear likely to preclude further liberalization on this front. (Indeed, some commentators expect to see measures at the state “blue sky” level to curtail or counteract the loosening of private placement regulation initialed by the SEC, and broker dealer regulation could be a target area.)

While the SEC’s repeal of the general solicitation prohibition is a positive development for issuers, the securities offering process continues to be heavily regulated, and the often ignored broker dealer regulations appear likely to take on greater significance and pose risk to unwary issuers.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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