Tuesday, October 13. 2020
The proposed exemption would establish two classes of finders, Tier I Finders and Tier II Finders, that would be subject to conditions tailored to the range of their respective activities. The proposal would also establish clear guidelines for registered broker activity and limited activity by finders that would be exempt from registration. Tier I and Tier II Finders would both be authorized to accept transaction-based compensation under the terms of the proposed exemption.
Tier I Finders
A Tier I Finder is limited to providing contact information of potential investors in connection with only one capital raising transaction by a single issuer within a 12-month period. A Tier I Finder may not have any contact with a potential investor about the issuer.
Tier II Finders
A Tier II Finder may solicit investors on behalf of an issuer, but the solicitation-related activities are limited to:
- identifying, screening, and contacting potential investors
- distributing issuer offering materials to investors
- discussing issuer information included in any offering materials if the Tier II Finder does not provide advice as to the valuation or advisability of the investment
- arranging or participating in meetings with the issuer and investor.
Conditions for Both Tier I and Tier II Finders
Under the exemption, both Tier I and Tier II Finders would be subject to certain conditions. The proposed exemption for Tier I and Tier II Finders would be available only in instances when:
- the issuer does not have to file reports under Section 13 or Section 15(d) of the Exchange Act
- the issuer desires to conduct the securities offering in reliance on an applicable exemption from registration under the Securities Act
- the finder does not engage in general solicitation
- the potential investor is an “accredited investor” according to Rule 501 of Regulation D, or the finder has a reasonable belief that the potential investor is an “accredited investor”
- the finder provides services following a written agreement with the issuer which includes a description of the services and compensation
- the finder is not associated with a broker-dealer
- the finder is not subject to legal disqualification, as defined in Section 3(a)(39) of the Exchange Act, at the time of their participation
With the proposed exemption, Tier I and Tier II Finders may not:
- rely on the exemption to participate in broker activity beyond the scope of the proposed exemption
- rely on the exemption to facilitate a resale of securities, a registered offering, or the sale of securities to investors that are not accredited investors or that the finder does not have a reasonable belief are accredited investors
- be involved in formulating the transaction or negotiating the terms of the offering
- handle customer funds or securities or bind the issuer or investor
- participate in the creation of any sales materials
- perform any independent evaluation of the sale
- engage in any “due diligence” actions
- assist or provide financing for such purchases
- provide guidance as to the valuation or financial advisability of the investment
Additional Conditions for Tier II Finders
Since Tier II Finders may be able to participate in a broader range of activity and potentially engage in more offerings with issuers and investors, the SEC has proposed further requirements as well as enhancing current requirements. A Tier II Finder desiring to rely on the proposed exemption would need to meet certain disclosure requirements and conditions, including a requirement that the Tier II Finder provide proper disclosures of the Tier II Finder’s role and compensation prior to or at the time of the request. Also, the Tier II Finder is required to obtain from the investor a written and dated acknowledgment of receipt of the necessary disclosures before or at the time of any investment in the issuer’s securities.
For more information on the proposed exemption, the Office of the Advocate for Small Business Capital Formation has posted two educational resources, a video and a chart, comparing some of the allowable activities, requirements, and limitations for Tier I Finders, Tier II Finders, and registered brokers.
There will be a 30-day comment period for the proposed exemption following publication in the Federal Register. Interested businesses and investors are encouraged to share feedback on the proposed rules by filling out the SEC’s internet comment form, submitting email comments to firstname.lastname@example.org, or sending physical mail to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-1090. In all cases, be sure to reference File Number S7-13-20.
Notice of Proposed Exemptive Order Granting Conditional Exemption from the Broker Registration Requirements of Section 15(a) of the Securities Exchange Act of 1934 for Certain Activities of Finders (sec.gov)