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SEC Proposal Will Allow Finders To Receive Commissions

On October 7, 2020, the Securities and Exchange Commission issued a press release that could dramatically reshape the role of finders in capital raising.

The SEC proposal would allow finders who are helping companies to raise money to receive a commission-a first for the SEC.

Specifically, the SEC is proposing to create exemptions from registration as a broker-dealer in two categories-Tier I and Tier II.

Why is this a big change?

In the past, finders helping in the capital raising process were prohibited from receiving commissions-a percentage of the capital raised.  In practice, this meant companies could pay flat fees to finders but not commissions.

Prior this proposal, finders were prevented from doing anything more than connecting companies and investors.  This means that any additional involvement beyond an introduction created a risk for the finder and the company that the SEC would view the activity as illegal unless the finder was a registered representative of a broker-dealer.

How do the exemptions work?

The SEC has divided finders into two groups: Tier I who introduce investors to companies only, and Tier II who introduce, provide information, and arrange meetings between investors and companies.  The SEC provided a useful chart here https://www.sec.gov/files/overview-chart-of-finders.pdf

Who can qualify as a finder?

Only natural persons who are not otherwise subject to disqualification for bad acts.

What types of investors can be contacted?

The exemptions apply to finders contacting only accredited investors.

What companies can the finder assist?

Only private non-reporting companies.

What are the other restrictions?

Even Tier II finders cannot do the following:

  • Engage in general solicitation
  • Structure or negotiate the investment
  • Hold cash or securities
  • Prepare sales materials
  • Assist with secondary sales
  • Assist with public offerings (IPOs and follow-on raises)

How will this change impact fundraising?

While it is hard to say with any precision it is likely to cause more finders to become involved in money raising knowing that there is a clear exemption to rely on.  This in turn should increase access to capital for start-ups and early stage companies.