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SEC Proposes Conditional Finder Exemptions from Broker-Dealer Registration

On October 7, 2020, the Securities and Exchange Commission (“SEC”) published a proposed exemption from registration for individuals who make capital introductions, otherwise known as “finders.” This proposed exemption would help facilitate the introduction of accredited investors with investment opportunities they may not otherwise have access to and conversely open up capital raising sources that would not otherwise readily be available for most businesses and money managers. The proposed exemption is particularly friendly for small businesses.

Section 15(a) of the Securities Exchange Act of 1934 (“Exchange Act”) requires registration for finders with a broker-dealer.

a) Registration of all persons utilizing exchange facilities to effect transactions; exemptions

(1) It shall be unlawful for any broker or dealer which is either a person other than a natural person or a natural person not associated with a broker or dealer which is a person other than a natural person (other than such a broker or dealer whose business is exclusively intrastate and who does not make use of any facility of a national securities exchange) to make use of the mails or any means or instrumentality of interstate commerce to effect any transactions in, or to induce or attempt to induce the purchase or sale of, any security (other than an exempted security or commercial paper, bankers’ acceptances, or commercial bills) unless such broker or dealer is registered in accordance with subsection (b) of this section.

But a finder can be someone whose role in deal-making is limited merely to having a valuable Rolodex and putting one party in touch with another. Requiring such a person to become registered with a broker-dealer or else run afoul of the Exchange Act can be a prohibitive regulatory hurdle and also have a chilling effect on fundraising.

The SEC’s proposed rule delineates two types of finders, Tier 1 and Tier II Finders.

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.

SEC Press Release October 7, 2020 found here.

It could be argued that perhaps someone with ultra-valuable contacts could offer to make capital introductions for a fee and then make a business out of it-in other words engage in investment banking activity. But considering that the contacts introduced are accredited investors, how much coddling do they really need? It could also be argued that the right to contract among consenting and sophisticated parties should not be limited for investment banking purposes only to large banks.