SEC proposes exemption from broker-dealer registration for finders


As the financial industry continues through its on-going process of consolidation and restructuring in response to competitive, regulatory and technology developments, many successful bankers are seeking to build new roles using their historic deal networks. In addition, successful and often serial entrepreneurs often find that they have developed unique deal networks to create new opportunities. These initiatives often run into a serious roadblock-broker-dealer registration with the SEC. The Exchange Act defines a “broker” as any person engaged in the business of effecting transactions in securities for the account of others and a “dealer” as any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise. These are very broad definitions, and the SEC and the courts have somewhat different views on their interpretation, the consequences to be within a definition (even if one is not in fact so) can be quite onerous and the existing exemptions are quite limited.

On October 7, the SEC proposed a new limited, conditional exemption which would allow “finders” to assist private companies with raising capital from accredited investors, without first having to register as a broker-dealer. The proposed exemption is aimed to help startups and small businesses to raise capital and to provide more clarity to investors, issuers, and the finders involved in these types of transactions.

The existing capital raising avenues for startups and small cap companies are limited, uninterested and certainly unincentivized, and very expensive, and so they often turn to “finders”. Historically, finders seeking to help companies in raising capital are required to navigate dark waters to determine whether their activities and compensation received for services would violate federal securities laws and, even if they do so legally, will often find that one party or another to a transaction will block payment prophylactically to avoid any potential risk of non-compliance. The proposed exemption, if adopted, would not only provide substantial relief and legal certainty for persons engaged in finder activities for issuers, but also issuers who have been concerned about investors’ rescission rights if the finder’s role violated broker-dealer registration requirements.

The proposed exemption would apply only to natural persons assisting private companies (i.e., companies that are not required to file reports under Section 13 or 15(d) of the Exchange Act) in raising capital pursuant to a private placement that is conducted in reliance on an exemption from the securities registration requirements of the Securities Act. The proposed exemption would establish Tier I Finders and Tier II Finders, based on the scope of their related permitted activities. Both Tier I and Tier II finders would be permitted to accept transaction-based compensation.

Tier I Finders may only provide potential investors’ contact information to a single issuer in relation to one capital-raising transaction by the issuer during a 12-month period, but cannot have any contact with potential investors about the issuer.

Tier II Finders may solicit investors on behalf of an issuer, but are limited to:

  • identifying, screening, and contacting potential investors;
  • distributing the issuer’s offering materials;
  • discussing issuer information included in any offering materials (without advising on valuation or advisability of the investment); and
  • arranging or participating in meetings with the issuer and prospective investors.

Given the unrestricted number of capital raises and issuers with respect to which a Tier II Finder would be able to act as a solicitor, Tier II Finder would also be required to provide disclosures to investors describing the finder’s role and compensation prior to or at the time of the solicitation and obtain a dated written acknowledgement of receipt of the required disclosures from each investor.

In addition, the proposed exemption for both Tier I and Tier II Finders would be available only where:

  • the finder does not engage in general solicitation;
  • the potential investor is an “accredited investor” as defined in Rule 501 of Regulation D 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.

There will be a 30-day comment period on the prosed exemption, with comments due to the SEC by no later than November 12, 2020. If you would like more information or assistance in submitting comments, please contact M. Ridgway Barker, Joe Tagliaferro, or David Guin.

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