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The SEC proposed an exemption from broker registration requirements for "finders" who help private companies raise capital from accredited investors. Under the proposed exemption, finders could identify and screen potential investors, distribute offering materials, and arrange meetings, but could not engage in general solicitation, provide investment advice, or perform other broker functions. The exemption aims to provide clarity around finders' regulatory status and ease capital raising burdens for small businesses. Comments on the proposal are due by November 12, 2020.

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H.I.M Dr. Lawiy Zodok
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25 views3 pages

AM Alert

The SEC proposed an exemption from broker registration requirements for "finders" who help private companies raise capital from accredited investors. Under the proposed exemption, finders could identify and screen potential investors, distribute offering materials, and arrange meetings, but could not engage in general solicitation, provide investment advice, or perform other broker functions. The exemption aims to provide clarity around finders' regulatory status and ease capital raising burdens for small businesses. Comments on the proposal are due by November 12, 2020.

Uploaded by

H.I.M Dr. Lawiy Zodok
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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ALERT ▪ Asset Management

October 19, 2020

SEC Proposes Exemption from Broker Registration for Private


Placement Finders
The Securities and Exchange Commission (the “Commission”) recently proposed an exemption from Attorneys
the broker-dealer registration requirements of Section 15(a) of the Exchange Act of 1934 (the Brynn Rail
“Exchange Act”) for “finders” who help issuers raise capital from accredited investors in private
placements. If adopted, the proposed exemption would provide a clear path for a natural person who is not registered as,
or associated with, a broker-dealer to receive transaction-based compensation in exchange for certain capital-raising
activities, and would end decades of uncertainty surrounding the regulatory status of so-called “finders.” Such an
exemption could prove useful for private fund sponsors and for other companies that seek to raise capital through a
person who is not a broker-dealer registered with the Commission. 1
Background

Although the term “finder” has not been defined in any Commission rule or statute, the term traditionally has been used
to refer to a person who receives a fee for performing certain early-stage activities in a securities transaction, including
“finding” potential buyers and/or sellers and connecting them with a counterparty. Finders typically take the view that
they are not required to register as brokers under the Exchange Act because finders do not perform the more substantial
activities that brokers perform, including advising investors on the merits of an investment opportunity, performing due
diligence, negotiating the transaction, and/or participating in the execution of the transaction. Legal guidance in this area
largely has been based on interpretations of decades of (in many cases inconsistent) no-action letters (and denials thereof)
issued by the Commission staff, as well as Commission enforcement actions, which similarly have yielded inconsistent
results. Accordingly, there has been little comfort for finders, as well as the issuers that engage finders, that the finders’
operations are compliant with applicable regulations. 2

The Commission’s proposed exemption seeks to bring clarity to this uncertain area and to ease the burden of raising
capital for small businesses.
The Proposal

The Commission’s order proposes to grant exemptive relief permitting a finder, without registering as a broker-dealer, to
provide certain capital-raising services in connection with primary offerings that are exempt from registration under the
Securities Act and to receive transaction-based compensation for these services. The proposed exemption could only be

1
The proposed order addresses only Commission requirements for broker-dealer registration; it does not address any requirements
arising under state laws, including state broker-dealer registration requirements and state finder requirements. Moreover, the
proposed exemption would not affect a finder’s obligation to comply with other applicable laws, including the antifraud provisions of
the Securities Act of 1933 (the “Securities Act”) and the Exchange Act.
2
The issue of whether a finder should be registered as a broker-dealer has implications not only for the finder, but also for the issuer.
For example, in 2013, the Commission filed an order instituting settled administrative and cease-and-desist proceedings not only
against the unregistered finder, but also against the private equity firm Ranieri Partners (“Ranieri”) and a former Ranieri executive in
connection with the unregistered finder’s solicitation of capital commitments for Ranieri private investment funds. The Commission
alleged that the finder performed activities for which the finder should have been registered as a broker and that Ranieri and its
former executive knew or should have known that the finder’s activities went beyond the scope of what the finder had been engaged
to do. Ranieri Partners agreed to pay a penalty of $375,000 and the former Ranieri executive agreed to pay a penalty of $75,000 and
observe a nine-month suspension from acting in a supervisory capacity at an investment adviser or a broker-dealer. See In re Ranieri
Partners LLC and Donald W. Phillips. The individual finder agreed to be barred from the securities industry. See In re William M.
Stephens.

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ALERT ▪ Page 2

used in connection with offerings for issuers that are not required to file reports under Section 13 or Section 15(d) of the
Exchange Act. Persons who are associated persons of a broker-dealer and persons who are subject to a statutory
disqualification as defined in Section 3(a)(39) of the Exchange Act would not be permitted to rely on the exemption. The
arrangement between the finder and the issuer would have to be in writing and contain certain prescribed information.

If adopted as proposed, the exemption would provide that the finder may actively solicit investors for multiple offerings
by:

• identifying, screening, and contacting potential investors;

• distributing issuer offering materials to investors;

• discussing issuer information included in any offering materials, provided that the finder may not give advice as
to the valuation or advisability of the investment; and

• arranging or participating in meetings with the issuer and the prospective investor.

However, the following conditions would apply to the finder and his or her activities:

• The finder may not engage in a general solicitation;

• Investors solicited by the finder must be accredited investors (or reasonably believed by the finder to be
accredited investors);

• The finder’s activities would be restricted such that the finder could not:

o participate in the preparation of any sales materials;

o be involved in structuring the transaction or negotiating the terms of the offering;

o provide advice as to the valuation or financial advisability of the investment;

o perform any independent analysis of the transaction;

o engage in any due diligence activities;

o handle customer funds or securities;

o have the ability to bind the investor or the issuer; or

o assist with obtaining or providing financing for the transaction.

As noted above, the proposed exemption may be helpful to private fund managers that want to hire unregistered finders
to source investors for their funds, as well as to operating companies that may not have access to financing through
traditional venture capital and “angel investor” networks. Issuers may not be reporting companies, and the securities may
not be publicly offered. The proposed exemption would not appear to benefit most registered funds, whose offerings
typically are not exempt from registration under the Securities Act and are not limited to accredited investors. Moreover,
the proposed exemption could not be used to facilitate a resale of securities. Finally, the proposed exemption also would
not provide a useful alternative to private fund managers that wish to establish an affiliated broker-dealer, as the finder is

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ALERT ▪ Page 3

not permitted to perform certain critical functions that these broker-dealers perform, including preparing sales materials,
structuring transactions, and/or advising on valuation and advisability of an investment.

Comments on the proposed exemption should be received by the Commission no later than November 12, 2020.

***

For further information about how the issues described in this Alert may impact your interests, please contact Brynn
Rail or your regular Ropes & Gray attorney.

This alert should not be construed as legal advice or a legal opinion on any specific facts or circumstances. This alert is not intended to create,
and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you
ropesgray.com are urged to consult your attorney concerning any particular situation and any specific legal question you may have. © 2020 Ropes & Gray LLP ATTORNEY ADVERTISING

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