December 3, 2020

Volume X, Number 338

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SEC Proposes Allowing ‘Finders’ to Raise Capital Without Registering as Broker-Dealers

The Securities and Exchange Commission (SEC) has proposed an exemption from broker-dealer registration requirements for certain “finders” who raise capital for issuers in private offerings and receive transaction-based compensation for doing so (i.e., a “success fee”). The proposed exemption would apply only to natural persons and would create two classes of exempt finders — Tier I and Tier II. Tier I finders would only be able to provide contact information of potential investors in connection with only a single capital raising transaction by a single issuer in any 12-month period. Tier II finders would be allowed to (1) identify, screen and contact potential investors; (2) distribute issuer offering materials to investors; (3) discuss 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 (4) arrange or participate in meetings with the issuer and investor.

The exemption from broker-dealer registration for both Tier I and Tier II finders would be subject to a number of conditions, including that the offering in question is a private offering (i.e., made in reliance on an exemption from registration under the Securities Act), all potential investors are accredited investors (or the finder has a reasonable belief that each potential investor is accredited), the finder and the issuer enter into a written agreement describing the services to be provided and the compensation to be paid, and the finder cannot be subject to a statutory disqualification as defined in the Securities Exchange Act. Additional heightened requirements would apply to Tier II finders, including that they would be required to make certain disclosures to potential investors prior to solicitation and obtain written acknowledgement of those disclosures prior to the time of investment. Finders would not be exempt from registration if they were to be involved in structuring the transaction or negotiating terms, handling customer funds or securities, prepare sales materials, perform independent analysis of the sale, engage in due diligence, provide financing or provide advice as to the valuation or financial advisability of the investment.

Katten will publish a detailed client advisory regarding the proposed exemptive order in the coming days.

The proposed exemptive order is available here.

©2020 Katten Muchin Rosenman LLPNational Law Review, Volume X, Number 283
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About this Author

Michael T. Foley, Katten, Lawyer, Finance, FINRA, Chicago
Special Counsel

Michael Foley represents broker-dealers, investment advisers and other financial services industry participants with respect to a broad spectrum of legal and regulatory matters arising under the federal securities laws.

Michael has nearly 20 years of experience in private practice and in-house at both a large, full-service broker-dealer and at an online discount broker-dealer, advising broker-dealers and other financial institutions regarding compliance with the federal securities and commodities laws, and with the regulations of the US Securities and Exchange...

312-902-5452
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