SEC Proposes Conditional Exemption for Finders from Broker-Dealer Registration
November 4, 2020
On October 7, 2020, the Securities and Exchange Commission (“SEC”) voted to issue a proposed exemptive order (the “Proposal”) that would, if adopted, permit certain natural person who is not registered as, or associated with, a broker-dealer to receive transaction-based compensation in exchange for capital-raising activities involving accredited investors. SEC indicated that such exemption is intended to assist small businesses in raising capital.
The Proposal attempts to provide a non-exclusive safe harbor from the broker-dealer registration requirements of Section 15(a) of the Exchange Act of 1934 (the “Exchange Act”) for two classes of finders: “Tier I Finders” and “Tier II Finders.” In each case, the exemption would be available only where:
Under the Proposal, Tier I Finders would be limited to providing contact information of potential investors with respect to only one offering and a single issuer within any 12-month period. A Tier I Finder could not have any contact with a potential investor about the issuer.
Tier II Finders would be allowed to engage in broader range of capital raising activities on behalf of the issuer, without limited to one transaction within 12-month period, however, the solicitation-related activities would be limited to:
A Tier II Finder wishing to rely on the proposed exemption would need to satisfy certain disclosure requirements and other condition, including:
These disclosures could be provided orally initially but would have to be provided in writing prior to at the time of the investment in the issuer’s securities. In addition, the Tier II Finder would be required to obtain from any investor he or she solicits, at or prior to the time of the investor’s investment, a dated, written acknowledgement of receipt of such disclosures.
The SEC is now accepting the comments on the Proposal until November 12, 2020.
The Proposal attempts to provide a non-exclusive safe harbor from the broker-dealer registration requirements of Section 15(a) of the Exchange Act of 1934 (the “Exchange Act”) for two classes of finders: “Tier I Finders” and “Tier II Finders.” In each case, the exemption would be available only where:
- the issuer conducting the offering 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 in reliance on an applicable exemption under the Securities Act of 1933 (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;
- the finder is not subject to statutory disqualification, as defined in Section 3(a)(39) of the Exchange Act, at the time of his or her participation; and
- the finder’s activities would be restricted such that the finder could not: (i) be involved in structuring the transaction or negotiating the terms of the offering; (ii) handle customer funds or securities or bind the issuer or investor; (iii) participate in the preparation of any sales materials; (iv) perform any independent analysis of the sale; (v) engage in any due diligence activities; (vi) assist or provide financing for such purchases; or (vii) provide advice as to the valuation or financial advisability of the investment.
Under the Proposal, Tier I Finders would be limited to providing contact information of potential investors with respect to only one offering and a single issuer within any 12-month period. A Tier I Finder could not have any contact with a potential investor about the issuer.
Tier II Finders would be allowed to engage in broader range of capital raising activities on behalf of the issuer, without limited to one transaction within 12-month period, however, 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; and
- arranging or participating in meetings with the issuer and investor.
A Tier II Finder wishing to rely on the proposed exemption would need to satisfy certain disclosure requirements and other condition, including:
- the names of and a description of relationship between the Tier II Finder and the issuer,
- a statement that the finder will be compensated for his or her solicitation activities by the issuer and a description of such compensation arrangement,
- any material conflicts of interest resulting from the arrangement, and
- an affirmative statement that the Tier II Finder is acting as an agent of the issuer, is not acting as an associated person of a broker-dealer, and is not undertaking to act in the investor’s best interests.
These disclosures could be provided orally initially but would have to be provided in writing prior to at the time of the investment in the issuer’s securities. In addition, the Tier II Finder would be required to obtain from any investor he or she solicits, at or prior to the time of the investor’s investment, a dated, written acknowledgement of receipt of such disclosures.
The SEC is now accepting the comments on the Proposal until November 12, 2020.