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The SEC has proposed a conditional exemption for certain “Finders” from the broker-dealer registration requirements when helping issuers raise capital from accredited investors in private transactions.
If adopted, the proposed exemption would permit natural persons to engage in certain limited activities involving accredited investors without registering with the SEC as brokers. Private fund advisers seeking investors in their funds stand to benefit from the exemption if such advisers do not own, or are otherwise affiliated with, a registered broker-dealer.
The proposed exemption would create two classes of exempt finders, Tier I Finders and Tier II Finders, that would be subject to conditions tailored to the scope of their respective activities. Tier I and Tier II Finders would both be permitted to accept transaction-based compensation under the terms of the proposed 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 twelve-month period. A Tier I Finder could not have any contact with a potential investor about the issuer.
Tier II Finders
Tier II Finders could solicit investors on behalf of an issuer, but the solicitation-related activities would be 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.
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 Securities Exchange Act of 1934
- the issuer is seeking to conduct the securities offering in reliance on an applicable exemption from registration under the Securities Act of 1933
- the Finder does not engage in general solicitation
- the potential investor is an “accredited investor” as defined in Rule 501 of Regulation D under the Securities Act 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
- 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.
The Commission provided a chart to further explain the parameters of its proposal, which can be found on the SEC’s website here.
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