Articles & Alerts

On October 7, 2020, the Securities and Exchange Commission (SEC) issued a Notice of Proposed Exemptive Order Granting Conditional Exemption from the Broker Registration Requirements of Section 15(a) of the Securities Exchange Act of 1934 for Certain Activities of Finders. This conditional exemptive order would permit persons whose role is to assist issuers by providing capital growth in private markets provided by investors, commonly referred to as “finders”, to engage in specific restricted actions without having to register as broker-dealers.

These changes are specifically targeted to benefit smaller businesses who rely on private markets as the primary source of their capital, and without finders it can be more difficult to reach accredited investors and raise capital. The Proposal also provides the long-overdue guidance on who may receive transaction-based compensation without being associated with a broker-dealer.

Proposed Changes

Previously, the Commission had not addressed the important role that finders may play in facilitating capital for small issuers. This new proposed relief is intended to be a limited approach to addressing capital formation needs of specific, smaller issuers, while maintaining protections for appropriate investors.

The proposed changes designate two groups of exempted finders: Tier I and Tier II. Each designation has separate rules depending on the type of narrow activities they might engage in without having to register as a broker-dealer and still receive compensation based on these transactions.

The proposal defines a Tier I Finder’s activities as limited to providing contact information of potential investors in connection with only one capital raising during a 12-month period, provided the finder does not have any contact with potential investors about the issuer.

A Tier II Finder is defined as a finder who meets certain conditions beyond those required for Tier I (noted below) and whose solicitation-related activities on behalf of an issuer 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; and arranging or participating in meetings with the issuer and investor.

The following illustrates some of the activity and payment differentials between Tier I and Tier II finders and a traditional broker-dealer.

Summary of Conditions of Tier I and Tier II Finders

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 relying 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.

Additional Conditions for Finders:

• Tier I and Tier II Finders are limited to natural persons, while registered brokers can be natural persons, entities, and associated persons of a broker-dealer.
• Tier I Finders may only provide investor contact information to the issuer.
• Tier II Finders, after obtaining written acknowledgment of the required disclosures prior to investment, are additionally permitted to identify, screen, and contact potential investors, distribute issuer offering materials to investors, discuss issuer information included in the offering materials, and arrange or participate in the meetings that result from this information sharing.
• Tier II Finders are permitted to participate in more than one capital-raising transaction within a 12-month period.
• Tier II Finders would also need to disclose to potential investors their relationship with the issuer, compensation arrangements and any material conflicts of interest.

The Commission believes that by providing limited exemptions for finders, it will increase opportunities and capital for smaller issuers while simultaneously protecting the activity scope and capital of broker-dealers. The exemptions would provide a safety net for finders, in addition to increasing their awareness on whether their activities necessitate a broker-dealer registration, which will hopefully decrease confusion and conflicts between brokers and issuers.

The Commission is seeking comments on the Proposal which are due 30 days after its publication in the Federal Register.

If you have any questions about this recent SEC notice and how it may impact you, please contact Jeffrey Rosenthal, David Horton or your Anchin Relationship Partner.