Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

At an open meeting of the Securities and Exchange Commission on October 7th, the Commission approved issuance of a proposed conditional exemptive order that would allow “finders” to engage with accredited investors in connection with a private securities offering without registering as brokers under the Exchange Act.

The regulatory status of finders has been a recurring issue for businesses accessing the private capital markets. In particular, smaller businesses are often reliant on the services of finders to connect with in investors who are interested in supporting emerging enterprises. The Commission’s proposed order would provide frequently requested clarity on precisely what activities a finder may engage in without triggering registration requirements for brokers.

Specifically, the proposal would create two classes of finders, Tier I Finders and Tier II Finders, that would be subject to conditions tailored to the scope of their respective activities as follows:

Tier I Finder

  • May provide contact information of potential investors in connection with a single capital raising transaction by a single issuer in a 12 month period.
  • May not have any contact with a potential investor about the issuer.

Tier II Finder

  • May solicit investors on behalf of an issuer but limited to:
    • identifying, screening, and contacting potential investors;
    • distributing issuer offering materials
    • discussing issuer information included in any offering materials (without advising on valuation or advisability of the investment); and
    • arranging or participating in meetings with the issuer and investor.

A Tier II Finder would also be required to provide disclosures describing their role and compensation prior to or at the time of the solicitation and obtain a dated written acknowledgment of receipt of the required disclosures from the investor.

Both Tier I and Tier II Finders would also be subject to various conditions specified in the order including the following:

  • the issuer conducting the securities offering must not be required to file reports under Section 13 or Section 15(d) of the Exchange Act;
  • the issuer must be conducting the securities offering in reliance on an applicable exemption from registration under the Securities Act;
  • the Finder may not engage in general solicitation; and
  • 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; and
  • the Finder is not subject to statutory disqualification, as that term is defined in Section 3(a)(39) of the Exchange Act, at the time of his or her participation.

The Commission also provided a helpful chart outlining the permissible activities under the exemption.

The proposed exemption will be subject to a 30-day comment period following publication in the Federal Register.

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