07 Oct Flash: SEC Proposes Allowing Finders to Raise Capital

It has taken almost 20 years, but the SEC has proposed a multi-tiered approach to allowing “finders,” who are not registered with broker-dealers, to raise money for private companies without being registered. This is especially important for smaller companies that do not get the attention of traditional investment banks and, to seek capital, often rely on these smaller operators. These intermediaries often cannot afford the cost of compliance with the SEC’s rigorous regulation of registered brokers.

Prior to 2001, the SEC’s position had been that any finder may accept a percentage of money raised as a commission if he or she did not negotiate or structure the deal, did not give financial advice, and merely made an introduction and stepped away. Several interpretive releases in 2001 reversed that and said virtually anyone receiving a percentage commission must be registered as a broker. The small business community and the ABA have for many years been seeking for the SEC to reverse this or provide for a “light” registration for finders.

The SEC released a great chart, outlining how the proposal, which is subject to comment and possible change before being finalized, would work. All finders need to be individuals rather than entities, and all would be limited to approaching only accredited investors. Companies that are fully SEC reporting would not qualify to use finders (query why not). Tier 1 finders would only be allowed to give a list of potential investors to a company and could not contact investors. Tier 2 finders would be permitted to make contact, distribute offering materials and attend presentations, but not give advice about the investment or valuation. Tier 2 finders would need to provide disclosure about their compensation to investors.

We will monitor developments regarding this potentially significant new tool for private (and some public) companies as the comment process unfolds.