SEC’s Proposed Finder Exemptions

SEC’s Proposed Finder Exemptions

In a press release on October 7th, the SEC proposed an exemption for “finders”—who are paid to assist in raising capital in private markets by connecting investors and issuers of securities—from broker registration requirements currently in place. The SEC’s stated aim of the exemptions is “to assist small businesses to raise capital and to provide regulatory clarity to investors, issuers, and the finders who assist them, and to “establish clear lanes for both registered broker activity and limited activity by finders that would be exempt from registration.”

The exemption defines and provides an exemption for two tiers of finders:

A Tier-I finder must be a natural person and a private entity. These finders are allowed primary exempt offerings, are allowed to engage in transaction-based compensation with accredited investors, and provide investor contact information to issuers. Simultaneously, anti-fraud protections still apply, written agreement with issuers is required, and statutory disqualification is allowed.

Tier-II finders may, in addition to the above: identify, screen, and contact potential investors, distribute issuer offering materials to investors, discuss issuer information included in offering materials, arrange or participate in meetings with the issuer and investor, and may participate in more than one capital raising transaction within a 12-month period. Written disclosure to investors is additionally required.

See the SEC’s Overview Chart for enumeration of the two-tier finder proposal (paraphrased above). Compare it especially to what a broker’s license currently allows (in the right-hand column) to see how far the proposed exemptions reach.

Violations: Under current SEC regulation, an introduction alone does not fall under the definition of “finder.” However, anything more than this, such as engaging in a transactional relationship with the investor or the issuer after making the introduction, or even making numerous introductions within a year’s time, can land one in the role of a finder. This definition applies even to “consultants” and “advisers” if they engage in the above, irrespective of their duties in their roles per se. Until the proposed exemption order turns into law, companies who use unlicensed finders may face liability for aiding and abetting violations of broker license law, be required to refund an investment and due to strict liability, face injunctions by state regulators and the SEC.

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