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Vedder Thinking | Articles SEC Proposes Conditional Exemption for Finders Engaging in Limited Capital Raising Activities


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On October 7, 2020, the SEC proposed a new, conditional exemption from broker-dealer registration for certain “Finders” who assist issuers with raising capital in private markets. If adopted, the proposed exemption would permit natural persons to engage in limited activities involving accredited investors without registering as brokers-dealers under the Securities Exchange Act of 1934. The proposed exemption would create two classes of Finders, Tier I Finders and Tier II Finders, each of whom would be subject to certain conditions based on the scope of their activities. Importantly, Tier I and Tier II Finders would both be permitted to accept transaction-based compensation under the terms of the proposed exemption.

  • Tier I Finders. A Tier I Finder would be limited to providing contact information of potential investors in connection with a single capital-raising transaction by a single issuer in a 12-month period. A Tier I Finder would be prohibited from having any contact with a potential investor about the issuer.
  • Tier II Finders. A Tier II Finder would be able to solicit investors on behalf of an issuer, but the solicitation-related activities must be limited to: (1) identifying, screening and contacting potential investors; (2) distributing issuer offering materials to potential investors; (3) discussing issuer information included in any offering materials, provided that the Tier II Finder does not provide advice regarding the valuation or advisability of the potential investment; and
    (4) arranging or participating in meetings with the issuer and potential investor.
  • Conditions for Tier I and Tier II Finders. The proposed exemption includes a number of conditions for reliance by both Tier I and Tier II Finders, including, among other things, the issuer must be a non-reporting entity; the offering must be exempt from registration; the Finder must not engage in a general solicitation; the potential investor must be an accredited investor; and the Finder must have a written agreement with the issuer.
  • Additional Conditions for Tier II Finders. In addition to the conditions for relying on the proposed exemption applicable to both Tier I and Tier II Finders, a Tier II Finder also must satisfy certain disclosure requirements and other conditions, including that the Tier II Finder must provide appropriate disclosures to a potential investor regarding the Tier II Finder’s role and compensation and obtain a dated written acknowledgment of receipt of the required disclosures from the potential investor.
  • Activities beyond the Scope of the Proposed Exemption. The SEC identified certain activities of a Finder that would be beyond the scope of the proposed exemption, including structuring the transaction or negotiating the terms of the offering; handling customer funds, preparing sales materials, performing independent analysis of the sale; engaging in due diligence activities; providing financing to potential investors; or advising as to the valuation or advisability of the potential investment.

The SEC’s proposing release is available here.


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