Finders is an amorphous activity where an individual or entity matchmakes money with private firms in need of funding. If you happen to have a great network of moneyed individuals, perhaps met at the club or a top university, things can be easier. But if you exist in the middle of Ohio or went to a state school, finding investors for a startup or early-stage firm can be more difficult. This is where Finders can play a key role.
While much of Finder activity happens informally, technically, it is a regulated activity. For an extended time, the Securities and Exchange Commission (SEC) has discussed updating the rules governing Finders. This month, the SEC Small Business Capital Formation Advisory Committee (SBCFAC) posted its recommendations to the Commission on improving the Finder rules.
The SBCFAC defines Finders as: natural persons who assist companies with limited capital-raising activities in the private markets from accredited investors without registering with the Commission as a broker-dealer.
The Committee notes that presently “regulatory ambiguity regarding finders creates additional barriers to capital-raising.”
With this in mind, the SBCFAC recommended the following principles for the Commission to act:
- Finders play an important role in facilitating the flow of capital to small and emerging businesses, and the current regulations discourage finder activity.
- There is a strong need for regulatory clarity to distinguish finder activity from broker-dealer services, and a limited exemption from broker-dealer regulations for finders who assist companies should be adopted.
- Federal preemption of state regulations should be considered when evaluating the effectiveness of any potential regulations or exemptions.
- Past Commission proposals/non-finalized rulemaking limiting a finder’s ability to contact investors or provide any commentary on the terms of investment was overly restrictive, and any regulation that gets re-proposed should permit finders to communicate with potential investors about the nature of the issuer and the terms of the financing.
- Regulations requiring disclosure of the identity of any finders, fees paid to finders, and any relationships between the finder and the issuer or other investors would be appropriate if not overly burdensome. Any registration process with which finders are required to comply should be minimal and open to non-professional participants to complete without needing assistance from professional advisors.
- Regulations requiring oversight of, or responsibility for, finder activity by issuers could be appropriate if not overly burdensome.
The SBCFAC reiterated the suggestions issued by a prior Committee in 2020:
- The framework should be kept simple.
- The framework should keep out bad actors.
- The Commission should consider requiring a notice filing for all finders, which includes information on fees charged for finders’ services.
- The Commission should work with state securities regulators to provide additional certainty for market participants with coordination among the states and the Commission.
- It is important that finders and issuers know the rules on how finders can assist with capital formation for small businesses.
- The Commission should consider a blanket exemption for finders for offerings under a certain size.
- The Commission should consider the issue of fees to finders, including the reasonableness of finders’ fees and/or limits on the amount of finders’ fees.
- The Commission should add clarity on prohibited and permissible activities.
While the SEC during the Biden Administration did little to support capital formation and innovation and pursued obtuse political objectives, the Commission under the leadership of Chairman Paul Atkins has shown a knack for taking decisive action in executing the SEC’s mission. There is a very good chance the SEC will consider the SBCFAC’s recommendations and propose rule changes that will improve the environment for capital formation.
Sponsored Links by DQ Promote
