More than three years after the SEC’s Advisory Committee on Small and Emerging Companies issued a recommendation, the SEC voted 3-2 to propose a conditional exemption from the broker registration requirements of Section 15(a) of the Exchange Act for “finders.” The proposed exemption would permit “finders” to engage in certain capital raising activities involving accredited investors and is intended to provide clarity to smaller businesses and their investors, and “finders” who assist them in raising capital. Under the proposed exemption, “finders” would be classified in two tiers with conditions tailored to the scope of their respective activities. Here’s the proposing release. This excerpt from the SEC’s press release summarizes the two classes of finders. See the complete press release for a summary of the applicable conditions:
Tier I Finders
A Tier I Finder 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.
For additional information, the Office of the Advocate for Small Business Capital Formation posted 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. The proposal is subject to a 30-day comment period.
Over the years, many small companies needing capital have found it difficult to determine when it’s appropriate to engage “finders.” In her statement in support of the proposal, Commissioner Hester M. Peirce found a way to acknowledge Eddie Van Halen’s “ebullient guitar-playing” by thanking Chairman Jay Clayton, the Division of Trading and Markets and others “for recognizing that the make-up-your-own-path approach works better for rock ‘n’ roll than it does for finders” — describing the current approach for finders as being ad-hoc and based on gut-feeling and guideposts gleaned from no-action letters and enforcement actions. Commissioner Peirce said the proposal provides a framework for finders and questioned whether the scope of the proposal should be expanded to secondary offerings.
Commissioners Allison Herren Lee and Caroline A. Crenshaw each issued dissenting statements criticizing the proposal for a lack of empirical support and investor protection concerns. In her statement, Commissioner Lee said she could have supported a rulemaking process that proposed a scaled registration format that required some form of record keeping and examination authority. Commissioner Lee continued by saying the proposal relies too much on the continued applicability of antifraud provisions as comfort for investor protections.
-Lynn Jokela, TheCorporateCounsel.net October 8, 2020
