March 1, 2021
Towards the end of 2020, the SEC released a notice of proposed order that would make it easier for finders to help small businesses raise capital. The proposed exemptions would allow certain finders who fall into different categories to be exempt from the restrictive rules involved with registering as a broker with the SEC. These rules have been in place since 2010. This change would allow smaller businesses to quickly raise more capital with the help of a finder who is less restricted by the brokerage rules.
The ability of a small business to raise money through an investor is crucial. Startup costs can take unexpected turns, and starting any business venture has an element of risk. The support of adequate investors, acquired through a finder who is not overly restrained, would benefit startups and small businesses.
The new SEC exemptions would create two-tier categories for finders who do not wish to register as brokers. Depending on what activities the finder engages in, they can identify which tier they fall into based on a chart produced by the SEC.
There are rules that apply to both tier one and tier two finders if they wish to fall into either of the categories. Take note that some of these rules also apply to the issuer with whom the finder may be working. They are summarized as follows and can also be found on page 18 of the document issued by the SEC:
● 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 in reliance 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 according to a written agreement with the issuer, including a description of the services provided and associated compensation.
●The finder is not subject to disqualification as defined in Section (3)(a)(39) of the Exchange Act. This includes both expulsion and suspension of a finder’s registration.
If a finder does not often find one investor and is only finding one investor for one issuer in a 12-month timeframe, they would fall under the tier one category. A finder in this category can have contact with the issuer, but no contact with the investor. They would be able to provide contact information about the potential investor to their issuer only.
A finder would fall into the tier two category if they engage in solicitation activity, defined by the SEC as “identifying, screening, and contacting potential investors.” The tier two finder can also distribute issuer offered materials to investors, and discuss issuer information.
Any activity beyond the described tier one and tier two categories would require a finder to register as a broker with the SEC.
As of publication, these are only proposed rules. Thus, the current finder’s fees rules are still in operation until the final rule, if any, is published.
For more information, consider contacting a knowledgeable lawyer at Polymath Legal PC by calling (833) 931-6418.