On Oct. 7, 2020, the U.S. Securities and Exchange Commission proposed a conditional exemption which would allow certain market participants to be exempted from registering as brokers under federal securities laws. The exemptions would benefit “finders” who assist issuers in capital formation by connecting them with accredited investors.
The goal of the proposed provisions is to remove barriers from small business owners looking for capital formation strategies, but who may not normally have access to certain fundraising resources. Under the exemptions, finders would be able to provide some services to issuers without registering as brokers; these provisions would apply to finders on a two-tiered system:
Tier one finders would be allowed only to provide issuers with contact information of potential investors and would not make contact with a potential investor about the issuer. The engagement could only be arranged in connection with a single capital raising transaction in a 12 month period on the part of the issuer.
Tier two finders would be classified as those who can participate in certain solicitation activities on behalf of an issuer. These activities include vetting and contacting possible investors, providing the issuer’s offering materials to investors, discussing the information from the offering materials as long as no valuation or advice is given to the investor, and organizing and participating in meetings between the issuer and investor.
To rely on the exemption, tier two finders would need to disclose their roles and compensation to investors and obtain written confirmation the disclosures were received by investors when or before beginning an engagement.
Both tier one and tier two finders would be required to meet several conditions to qualify for the proposed exemption, including:
- Not being required to file Section 13 or 15(d) reports under the Exchange Act;
- Conducting offerings under an acceptable exemption under the Securities Act;
- Not engaging in general solicitation;
- Ensuring potential investors are accredited investors;
- Having a written agreement in place between the finder and issuer which describes services and compensation;
- Not being associated with a broker-dealer; and
- Not being subject to statutory disqualification.
Once qualified for the exemption, finders would not be able to do certain tasks for issuers and investors, including:
- Assisting with structuring or negotiating a transaction or offering;
- Handling any customer or investor funds;
- Helping to prepare sales materials;
- Analyzing a sale independently;
- Assisting with due diligence;
- Providing financing for purchase of these services; and/or
- Advising on or providing a valuation on an investment.
WHAT DOES THIS MEAN FOR ME?
The SEC is currently accepting public comments on the proposed conditional exemption. If you have comments on these terms, consider sharing them with the SEC as they may affect the final outcome of the provisions.