SEC Proposes Conditional Exemption From Broker Registration Requirements For Finders Assisting Small Businesses With Capital Raising Efforts

Cole Schotz
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Cole Schotz

Easing of restrictions may be on the way for smaller issuers seeking to rely on “finders” to assist with their capital raising efforts.  On October 7, 2020, the U.S. Securities and Exchange Commission (the “SEC”) proposed a new limited, conditional exemption from broker registration requirements of Section 15(a) of the Securities Exchange Act of 1934 (the “Exchange Act”) 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.  This proposed exemption might also allow certain existing registered broker-dealers to possibly withdraw their registration as well. The purpose of the proposed exemption is to help smaller businesses raise capital and provide regulatory clarity to the parties involved in such efforts.

The proposed exemption would create two classes of exempt Finders, Tier I Finders and Tier II Finders, and establish clear lanes for both registered broker activity and limited activity by finders that would be exempt from registration.  Tier I and Tier II Finders would be permitted to accept transaction-based compensation under the terms of the proposed exemption, but each would be subject to certain conditions tailored to the permitted scope of their respective activities.

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 12-month period.  A Tier I Finder would not be permitted to have any contact with a potential investor about the issuer.

Tier II Finders would be able to 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.

Both Tier I and Tier II Finders would be subject to the following conditions in order to take advantage of the proposed exemption:

  •  the issuer is not required to file reports under Section 13 or Section 15(d) of 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.

Additionally, because Tier II Finders would participate in a wider range of activity and have the potential to engage in more offerings with issuers and investors, the SEC has proposed additional disclosure requirements and conditions.  These disclosure requirements, which include a requirement that the Tier II Finder provide appropriate disclosures of such Tier II Finder’s role and compensation, must be made prior to or at the time of the solicitation.  The Tier II Finder would also need to obtain from investors a dated written acknowledgment of receipt of the required disclosures prior to or at the time of any investment in the issuer’s securities.  The exemption would not apply to a number of activities, including resales of securities, due diligence, and negotiating terms of an investment.

To read the full proposal, click here.

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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