I’ve noted in several blog posts (most recently here) that the SEC had not provided definitive guidance on an exemption for so-called “finders” from broker-dealer registration requirements. Now we have that guidance, at least in proposed form, which if enacted would provide clarity for issuers and would-be finders. The proposal was approved by the SEC Commissioners on a 3-2 vote (because it’s 2020 and of course it’s contentious), so there is perhaps a greater than usual possibility of changes to the rules before finalization.
As proposed, the exemption would be only available to natural persons, not entities. A potential finder would need to fall under Tier 1, for occasional one-off situations, or Tier 2, for people doing this more regularly. Tier 2 finders would have additional disclosure requirements and would need to obtain a written acknowledgment of the arrangement from the investors that are, well, found by them. There are a number of restrictions applied to both tiers, including limiting finder activities to accredited investors and the finder not getting involved in negotiation of the terms of the offering. The SEC’s press release includes a fact sheet listing the various restrictions applicable to each tier individually and to both of them.
The pending rules will be welcome news for many small businesses. In a perfect world, all companies seeking to raise capital would be able to engage a registered broker-dealer, but there are few broker-dealers that find it worth the effort and risk to be engaged for small raises, and those that do charge a lot for the service, in cash and equity compensation. Small issuers are forced to pound the pavement for cash themselves, reaching out to friends and family, angel groups or others, which takes time away from the actual development of the business. The ability to expand one’s network of potential investors through finders, under a clear, SEC-sanctioned exemption, should be helpful to capital-hungry startups.