On October 7th, the SEC proposed a new limited, conditional exemption from broker registration requirements for “finders” who assist issuers with raising capital in private markets from accredited investors. The planned exemption would allow natural persons to participate in certain limited activities involving accredited investors without being registered as brokers with the SEC. The proposed exemption aims to help small business facing challenges raising the capital as well as provide regulatory clarity to investors, issuers, and the finders who assist them by establishing two classes of finders: Tier I Finders and Tier II Finders.
Tier I and Tier II Finders would be subject to conditions tailored to the scope of their respective activities. The proposed exemption would establish clear guidelines for both registered broker activity and limited activity by finders that would be exempt from registration.
Tier I Finders:
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:
May solicit investors on behalf of the issuer, but the solicitation-related activities are 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
- Arranging or participating in meetings with the issuer and investor
Conditions for Both Tier I and Tier II Finders
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 when:
- Issuer does not have to file under Section 13 or Section 15(d) of the Exchange Act
- Issuer would like to conduct the securities offering in reliance on an applicable exemption from registration under the Securities Act
- Finder does not engage in general solicitation
- 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”
- Finder has written agreement with the issuer that includes a description of the services provided and compensation
- Finder is not associated with a broker-dealer
- Finder is not subject to legal disqualification at the time of their participation, as defined in Section 3(a)(39) of the Exchange Act
Tier I and Tier II Finders may not:
- Participate in broker activity beyond the scope of the proposed exemption
- Facilitate a registered offering, resale of securities, or sale of securities to investors that are not accredited
- Be involved in structuring the transaction or negotiating the terms of the offering
- Handle customer funds or securities
- Help with preparation of sales materials
- Perform independent analysis of the sale
- Aid in due diligence
- Assist or provide financing for such purchases
- Provide guidance on the valuation or financial advisability of the investment
Additional Conditions for Tier II Finders
Since Tier II Finders may 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 requirements. In order for Tier II Finders to take advantage of the exemption they would need to satisfy certain disclosure requirements:
- Provide appropriate disclosures of the Tier II Finder’s role and compensation prior to or at the time of the solicitation
- 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.
For more information, The Office of the Advocate for Small Business Capital Formation has prepared a video and a chart showing a comparison of some of the permissible activities, requirements and limitations for Tier I Finders, Tier II Finders, and registered brokers.
There will be a 30-day comment period for the proposed exemption following publication in the Federal Register.
Source: SEC Proposes Conditional Exemption for Finders Assisting Small Businesses with Capital Raising (sec.gov)
