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SEC Proposes New Exemptions to Expand the Scope of "Finders"

By Robert R. Boeche II, Esq., of Shustak Reynolds & Partners, P.C. posted on Tuesday, November 17, 2020.

In October 2020, the U.S. Securities and Exchange Commission (“SEC”) proposed an order [1] which could expand when/what “finders” are permitted to receive as compensation without registering as a broker. Generally speaking, a finder connects investors with issuers of securities for a commission, or a finder’s fee. Currently, the Exchange Act of 1934 takes a narrow view on when it is permissible to pay finders without triggering registration requirements.  The proposed order would create two classes of finders, each subject to conditions tailored to the scope of their respective activities:

1. Tier 1 finders would be permitted only to provide a list of potential investors, and their contact information, for only a single capital raising transaction per 12-month period. The finder could not contact the potential investors about the issuer or investment opportunity.

2. Tier II finders could solicit individual investors on behalf of an issuer, so long as he or she provides certain disclosures at the time of solicitation. The finder would be limited to these activities:

  • identifying, screening, and contacting potential investors;
  • distributing issuer offering materials to investors;
  • discussing issuer information included in any offering materials, provided that the Tier II finder does not provide advice as to the valuation or advisability of the investment; and
  • arranging or participating in meetings with the issuer and investor.

The order proposes exemption from registration as a broker at the Federal level, but does not provide relief from any state level restrictions on a finder’s activities. However, finders based in California may rely on Corporations Code Section 25206.1 for exemption from broker-dealer registration when connecting a California issuer with accredited investors if the offering is less than $15 million.

While the period to submit comments on the proposed rule has closed, the SEC has issued some remarks on the progress of proposed regulations. [2] 

 

Shustak Reynolds & Partners, P.C. focuses its practice on securities and financial services law and complex business disputes. 
We represent many broker-dealers, registered representatives, investment advisors, investors and businesses. 
Attorney Robert R. Boeche, II can be reached in the firm’s San Diego office at (619) 696-9500. 

 


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