Finders Keepers – SEC Proposes Relief from Broker-Dealer Registration for Certain Finders

Finders

The US Securities and Exchange Commission (SEC) last week proposed an exemption from the broker-dealer registration requirements for certain “Finders” who raise capital for issuers in private offerings and receive transaction-based compensation or a “success fee” based on the amount raised in the transaction. This would effectively create a new category of unregistered financial professionals. “If the new rule cleans up the seedy side of the industry by eliminating under-the-table retainers and moves it to performance-based compensation, then that’s a good thing,” said Richard Hillson, founder of boutique investment consultancy Hillson Consulting.

The SEC stated that the reason for the proposed change is to enhance capital formation resources for smaller companies and private funds, which lack the ability and size to attract cost-effective placement services from registered broker-dealers, without creating an unnecessary risk for investors. “If this is executed properly, it will go a long way to helping smaller groups raise money without the expense and effort of going the full broker-dealer route,” Hillson continued.

The proposed exemptions would fall into two classes of finders, Tier 1 and Tier 2 Finders allowing them to receive transaction-based compensation without registration as a broker under certain conditions.  A comparison of current broker-dealer, and proposed Tier I and Tier II Finder requirements can be found at https://www.sec.gov/files/overview-chart-of-finders.pdf.

Common Requirements

The Issuer

  • The issuer must be a private company that is not a reporting company under the Exchange Act and must be conducting a securities offering that is not required to be registered with the SEC under the Securities Act of 1933.

Both Tier 1 and Tier 2 Finders:

  • The finder must not engage in a “general solicitation.” However, if the finder already has a relationship with a potential investor, this would not be considered a general solicitation.
  • The finder cannot be involved in structuring the transaction or negotiating the terms of the offering, handle customer funds or securities or bind the issuer or the investor, participate in the preparation of any sales materials, perform any independent analysis of the sale, engage in any due diligence activities, assist or provide financing for such purchases, or provide advice as to the valuation or financial advisability of the investment.
  • All of the investors referred by the finder either are “accredited investors” or are reasonably believed by the finder to be accredited investors.
  • The finder provides services under a written agreement describing both the services to be provided by the finder and the compensation to be paid for such services.
  • The finder is not an associated person of a broker-dealer or otherwise prohibited from participating in a securities offering.

Specific Requirements

Tier 1 Finders:

  • would only be permitted to provide an issuer with contact information (names, telephone numbers, e-mail addresses, and social media information) of potential investors in connection with a single capital-raising transaction by a single issuer in a 12-month period;
  • cannot have any direct contact with potential investors about the issuer or the anticipated capital raise.

These restrictions are likely to be limiting for most finders and for issuers seeking their services.  As such Tier II Finders are likely to be the most realistic category for both finders and companies.

Tier 2 Finders:

  • would be permitted to engage in additional solicitation-related activities on behalf of any issuer, such as identifying, screening, and contacting potential investors, distributing issuer offering materials to potential investors, discussing issuer information, and arranging and/or participating in meetings with the issuer and potential investors;
  • would be prohibited from providing advice as to the valuation or financial prudence of the proposed investment;
  • would not be subject to any frequency or time limitations;
  • must disclose to a potential investor, no later than the time of the solicitation, the names of the finder and the issuer, the nature of the relationship, a statement that the finder is being compensated and a description of the compensation, any material conflicts of interest, and that the finder is acting as an agent of the issuer, is not acting for a broker-dealer and is not undertaking a role to act in the investor’s best interest;
  • and must receive written acknowledgment of the receipt of the finder’s required disclosures.

The proposal is structured as a non-exclusive “safe harbor” from broker-dealer registration if the conditions are met and could provide much-needed clarity and certainty for small and emerging companies, their investors, and their advisors.

Get in Touch

Any prospective Finders, private companies, or managers and advisors of private funds who have questions or need advice on the SEC proposal, please contact any of the lawyers below.

Allan-Rooney

Allan Rooney
Founding Partner – New York
+1 212 545 8022
allan.rooney@rooneynimmo.com

Finders Keepers – SEC Proposes Relief from Broker-Dealer Registration for Certain Finders 1

Tim Davis
Partner – New York
+1 212 545 8022
tim.davis@rooneynimmo.com

 

This article is one of a series intended to de-mystify common legal issues for the non-lawyer and entrepreneur audience – they are designed to foster discussion and is by no means exhaustive. These materials are for informational purposes only. Nothing herein is intended nor should be regarded as legal advice. The distribution of this article to any person does not establish an attorney-client relationship with our firm. Rooney Nimmo assumes no liability in connection with the use of this publication. This bulletin is considered attorney advertising under the applicable rules of New York state. Rooney Nimmo UK is regulated by the Law Society of Scotland and Rooney Nimmo US by the New York rules of professional conduct. All attorneys and solicitors listed in this firm stipulate their jurisdictional limitations. Rooney Nimmo in the USA is a law firm registered as a New York State professional corporation.

 

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