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By Chad Wold

SEC Proposes Conditional Exemption for Finders Assisting Small Businesses with Capital Raising

It has taken almost 20 years, but The Securities and Exchange Commission this week voted to propose a new limited, conditional exemption from broker registration requirements for “finders” who assist issuers with raising capital in private markets from accredited investors.  If adopted, the proposed exemption would permit natural persons to engage in certain limited activities involving accredited investors without registering with the Commission as brokers.  The proposed exemption seeks to assist small businesses to raise capital and to provide regulatory clarity to investors, issuers, and the finders who assist them.

What does this mean for small businesses?

What the SEC proposed is 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 small business owners 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.

As a small business owner how do I understand what the SEC is proposing for permissible fundraising?

With the proposal, 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.

  • 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.

If you have any questions on what this means for you or your small business please contact our office for more information.