On October 7, 2020, the Securities and Exchange Commission (“SEC”) proposed a new long-awaited exemption for “finders.” Finders are persons or entities who help companies raise private capital by making introductions to accredited investors, typically in exchange for a fee.
Finders have long occupied a grey area in the law, in many instances arguably engaging in activities that would require them to register as broker-dealers. With the SEC’s proposed limited exemption, these actors could have regulatory clarity, which could encourage the ability of companies to connect with investors in the private markets.
Specifically, the proposed exemption, if adopted, would permit natural persons, but not legal entities, acting as either “Tier 1 Finders” or “Tier II Finders” to engage in a range of permitted activities involving accredited investors without registering with the SEC as brokers. As further set forth below, Tier II Finders would be permitted to engage in a broader set of activities and therefore be subject to an additional requirement that they (i) provide disclosures around their role in the transaction and their compensation, when soliciting investor interest and (ii) receive a dated, written acknowledgment from the investor(s) that they have provided these required disclosures.
- Tier I Finders: May provide contact information for potential investors only to private companies (may not initiate contact) in connection with one capital raise by one private company in any given 12-month period.
- Tier II Finders: May engage in soliciting investors in the following limited capacities: (i) identify, contact, and screen prospective investors; (ii) distribute issuer’s offering materials and discuss contents of the same (without providing advice around pricing or advisability of an investment); and (iii) coordinate and participate in meetings with prospective investors and the issuer.
Both tiers of Finders would be subject to additional conditions, including without limitation, that the Finder not engage in general solicitation and that the Finder provide these services to issuers pursuant to written agreements that describe both the services and the fees.
The SEC has prepared a helpful chart that lays out the conditions for the proposed exemption for both Tier I and Tier II Finders, available here. In terms of next steps, the SEC has requested comments, including a list of 45 specific requests for feedback around the proposal (available here) during the comment period that runs until November 12, 2020.
If you have any questions around the proposal or the permissible role of Finders versus brokers and potential liabilities around the same, please reach out to a member of our Securities and Capital Markets Group.