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SEC Proposes Conditional Exemption for Finders Assisting Small Businesses with Capital Raising SEC Proposes Conditional Exemption for Finders Assisting Small Businesses with Capital Raising

SEC Proposes Conditional Exemption for Finders Assisting Small Businesses with Capital Raising

On October 7, 2020 the Securities and Exchange Commission ("SEC") voted to propose a new limited, conditional exemption from broker registration for finders who assist issuers with raising capital in private markets from accredited investors ("Finders"). The proposed exemption would permit natural persons to engage in certain limited activities involving accredited investors without registering as brokers. As SEC Chairman Jay Clayton points out in the SEC press release, "[t]here has been significant uncertainty for years…about finder's regulatory status." The proposed exemption would attempt to clear up the uncertainty of the regulatory status of Finders that currently exists in the broker industry.

The SEC is proposing to grant a conditional exemption from the broker registration requirements of Section 15(a) of the Securities Exchange Act of 1934. The exemption would create two classes of Finders, Tier I Finders and Tier II Finders. Both Tier I and Tier II Finders would be permitted to accept transaction-based compensation under the proposed terms of the exemption.

Tier I Finders

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 could not have any contact with a potential investor about the issuer.

Tier II Finders

A Tier II Finder could solicit investors on behalf of an issuer, but the solicitation-related activities would be limited to: (i) identifying, screening, and contacting potential investors; (ii) distributing issuer offering materials to investors; (iii) 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 (iv) arranging or participating in meetings with the issuer and investor.

Conditions for Both Tier I and Tier II Finders

Both Tier I and Tier II Finders would be subject to certain conditions. The proposed exemption for Tier I and Tier II Finders would be available only where:
  • 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;
  • 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.
A Finder engaging in any securities or capital raising business that goes beyond the limited scope of the condition listed for Tier I and Tier II Finders could not rely on the conditional exemption from registration as a broker.

Additional Conditions for Tier II Finders

Because Tier II Finders could participate in a wider range of activity and have the potential to engage in more offerings with issuers and investors, the Commission has proposed additional, heightened requirements. A Tier II Finder wishing to rely on the proposed exemption would need to satisfy certain disclosure requirements and other conditions. These disclosure requirements, which include a requirement that the Tier II Finder provide appropriate disclosures of the Tier II Finder’s role and compensation, must be made prior to or at the time of the solicitation. Further, the Tier II Finder must obtain from the investor, prior to or at the time of any investment in the issuer’s securities, a dated written acknowledgment of receipt of the required disclosures.

The SEC's press release on the proposed conditional registration exemption can be found here.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.
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