The Securities and Exchange Commission today approved a proposal that would permit so-called “finders” to solicit and recruit accredited investors to invest in private placements without being required to register as broker-dealers.
The proposed exemption, which would create two tiers of finders, is designed “to assist small businesses to raise capital and provide regulatory clarity,” the SEC said in a statement.
The staff’s proposed exemptive order “is intended to be narrowly tailored to address the capital formation needs of entrepreneurs and certain smaller issuers while preserving investor protections,” SEC Chairman Jay Clayton said after commissioners voted 3-2 to approve the proposal for comment.
SEC Commissioner Allison Herren Lee dissented, as did Commissioner Caroline Crenshaw, who called the proposal “a radical departure from established registration requirements.”
According to Crenshaw, under the proposed approach, issuers of any size would be permitted to employ finders to raise unlimited amounts of capital outside of the broker-dealer regulatory regime. "I cannot support deliberately expanding markets that even our expert staff cannot accurately assess or analyze,” Crenshaw said. In “an area of the securities markets that is already prone to fraud, the proposed approach would eliminate the important investor protections the established broker-dealer framework provides.”
Despite Crenshaw’s concerns, the agency approved the proposal for comment for 30 days. It can be found here: https://www.sec.gov/news/press-release/2020-248.
Private equity firms held roughly $3.9 trillion in assets as of 2019, up 12.2% from 2018, according to the SEC. While wealthy investors sometimes seek out private equity funds to earn returns that beat public markets, private equity can be expensive, opaque and is generally far less regulated, critics say.
Clayton said the proposal will help small businesses grow and thrive, “particularly when they are located in places that lack established, robust capital raising networks. If adopted, the proposed relief will bring clarity to finders’ regulatory status in a tailored manner that addresses the capital formation needs of certain smaller issuers while preserving investor protections,” Clayton said.
To help facilitate private placement capital raising, the proposed exemption would create two classes of exempt finders—tier I and tier II finders. While both would be permitted to accept transaction-based compensation under the terms of the proposed exemption, they would be subject to conditions tailored to the scope of their respective activities.
A Tier I finder would be limited to providing contact information of potential investors in connection with only a single capital raising transaction by a single issuer in a 12-month period. A Tier I Finder could not have any contact with a potential investor about the issuer.