SEC Proposes New Rules on “Finders”

On October 7, 2020, the Securities and Exchange Commission¬†proposed rules to exempt for the first time “finders” from the need to register as broker-dealers. For a number of years, attorneys have advised that issuers could use “finders” not registered as broker-dealers to find potential investors on capital raises if the finders kept their activities very restricted so as not to solicit and provide only contact information. Although the SEC staff had issued a few no-action letters that supported this practice, there were no rules adopted and the advice from attorneys ranged over a fairly wide area. The new rules would provide specific exemptions for two tiers of finders. In both cases (in summary, with the full proposed rules subject to the proposal), the rules would apply only to private placements by private companies where the finder has not engaged in a “general solicitation” and has reason to believe that the potential investors is an “accredited investor”.¬† Among other requirements, a written finder’s agreement is necessary. A Tier I Finder provides only contact information on potential investors to the client. The finder can only do so regarding one capital raise within 12 months. The finder cannot have any contact with the potential investor; the issuer must contact the potential investor itself. A Tier II Finder may expand the scope of permissible “finder” a bit by allowing the finder to screen the potential investor. The Tier II Finder can provide offering materials to the potential investor and discuss them as long as the information is eventually provided in writing and the finder does not provide any recommendations. The finder can also arrange and participate in meetings with the issuer. The Tier II Finder would need to provide to the potential investor, at or prior to the solicitation, information on the relationship with the issuer, the finder’s compensation, material conflicts of interest, and that the finder is the agent of issuer. The Tier II Finder also needs to obtain a statement of the investor, at or prior to the investment, that the investor has received all of the necessary disclosures. Comments on the proposals are due 30 days after publication in the Federal Register. The proposals, especially regarding the Tier II Finder rules, are expected to be somewhat controversial, especially among the broker-dealer community.