Finders: Recommendations to the SEC

The SEC’s Advisory Committee on Small and Emerging Companies recently issued recommendations regarding the regulation of finders.

If you are not familiar with the rules, the SEC takes a very narrow view of who can help companies find investors without having to register as a broker-dealer.

Broker-dealer registration is so onerous that people won’t engage in an activity if it would trigger broker-dealer registration.

Here is how the Committee described the problem:

Capital raised in private offerings using SEC Regulation D is large when compared to other exempt offerings and registered offerings. However, only 13% of Regulation D offerings reported using a financial intermediary, such as a broker-dealer or finder, between 2009 and 2012. This is due, in part, to lack of interest from registered broker-dealers given the legal costs and risks involved in undertaking a small transaction and ambiguities in the definition of “broker.”

One of the reasons fundraising is so hard today is because of all of the regulations in place.

As the Committee says:

Failure to address the regulatory issues surrounding finders and other private placement intermediaries impedes capital formation for smaller companies.

I believe, as the Committee says, that “[a]ppropriate regulation would enhance economic growth and job creation.”

The Committee’s letter continues:

The Committee is of the view that imposing only limited regulatory requirements, including appropriate investor protection safeguards, on private placement intermediaries that limit their activities to specified parameters, do not hold customer funds or securities and deal only with accredited investors would enhance capital fonnation and promote job creation.

I like the components of the above:

  • limit activities to specified parameters;
  • do not hold customer funds or securities; and
  • deal with only accredited investors.

I agree with the Committee: the SEC ought to reduce the regulatory hurdles that small and emerging companies have to jump over to raise capital.

You can find the Committee’s full recommendations in the Committee’s letter to SEC Chair Mary Jo White.

But here they are, at least in part–the parts I find interesting.

First, the Committee recommends:

The Commission take steps to clarify the current ambiguity in broker-dealer regulation by determining that persons that receive transaction-based compensation solely for providing names of or introductions to prospective investors are not subject to registration as a broker under the Securities Exchange Act.

This is really interesting. Notice the parameters:

  • solely for providing names of or introductions to prospective investors.

Then the Committee goes on:

The Commission exempt intermediaries that are actively involved in the discussions, negotiations and structuring, as well as the solicitation of prospective investors, for private financings on a regular basis from broker registration at the federal level, conditioned upon registration as a broker under State law.

This is important.

  • intermediaries actively involved in the discussions, negotiations and structuring, as well as the solicitation of prospective investors, on a regular basis, would have to be registered–but under state law.

These are clear lines.

I hope the SEC takes action on the Committee’s recommendations.

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