A Tier II finder could solicit investors on behalf of an issuer and engage in solicitation-related activities including the following:
• identifying, screening, and contacting potential investors;
• distributing issuer offering materials to investors;
• discussing 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,” according to the SEC;
• arranging or participating in meetings with the issuer and investor.
Finders will not be allowed to engage in general solicitation and must make sure or reasonably believe a potential investor is an accredited investor, the SEC said.
Broker-dealer associated persons will not be permitted to be finders. Anyone receiving a statutory disqualification from the securities business would also be prohibited from acting as a finder.
Finders are also prohibited from structing or negotiating terms of transactions, handling customer funds or securities, preparing sales materials, or performing any independent analysis or due diligence on the investment. They are also prohibited from assisting with financing of purchases or offering valuation or financial advisability advice.
Because of their broader capacity, Tier II finders must disclose their role and compensation prior to or at the time of the solicitation. They also must obtain from the investors a dated written acknowledgment of receipt of the required disclosures when or before an investment is made.
Over the past decades, Clayton said there have been “many, repeated calls for the commission to provide clarity in this area.” In particular, broker-dealers struggled to know when they could engage a finder who isn’t registered as a broker-dealer, he said.
“As a result of this uncertainty, individuals potentially could be engaging in brokerage activity, or alternatively, not serving the market because of the regulatory uncertainty associated with playing even a limited role in a capital raise. The current patchwork of staff guidance and no-action letters in this area has not provided needed clarity, and the time for commission action is overdue,” Clayton added.