SEC Proposes Exemption from the Broker Registration Requirements for Finders

October 13th | 2020

The SEC recently submitted a proposal to establish an exemption from broker registration requirements for finders that engage in certain capital raising activities on behalf of issuers seeking to raise funds from accredited investors. The proposal establishes two categories: Tier I Finders and Tier II Finders, which have varying ranges of activities that they can perform, provided they meet the following conditions:

  1. the issuer is not required to file SEA Section 13 or Section 15(d) reports;

  2. the securities will be issued in reliance on a specific registration exemption under the Securities Act of 1933;

  3. the Finder is not engaging in general solicitation;

  4. the target of the solicitation is an "accredited investor" (as defined in Rule 501 of Reg. D);

  5. the Finder is not an associated person of a broker-dealer;

  6. the Finder provides its services in connection with a written agreement with the issuer specifying certain information (including the Finder's compensation and the services it is providing); and

  7. the Finder is not subject to statutory disqualification.

Tier I Finders are limited to sharing contact information of potential investors with an issuer regarding one capital raising transaction per year. Tier II Finders are allowed to solicit investors on an issuer's behalf, but these Tier II Finder activities would be restricted to: (i) identifying, screening, and contacting potential investors; (ii) distributing offering materials to investors; (iii) discussing issuer information included in any offering materials, as long as the Finder does not provide advice as to valuation or advisability of the investment; and (iv) arranging or participating in meetings with the issuer and investor.

The proposed exemption, if adopted, would allow qualifying finders to accept transaction-based compensation for their capital-raising activities. This a significant change, though keep in mind that each state has its own regulatory regime with respect to brokers, so measuring the true impact of the SEC’s proposal depends on what state regulators do in response.

22 views0 comments