Finders are an amorphous activity in which an individual or organization makes money through private firms in need of financing. Things might be easier if you have a great network of moneyed people who maybe met at a club or a good university. But if you live in mid-Ohio or went to a public school, finding investors for a startup or early-stage firm may be more difficult. This is where Finders can play an important role.
Most Finder events are informal and technically organized. The Securities and Exchange Commission (SEC) has long debated updating the rules governing Finders. SEC this month Small Business Capital Formation Advisory Committee (SBCFAC) has published its recommendations to the Commission on improving the Finder rules.
SBCFAC defines Finders as: Natural persons who assist companies with limited capital raising activities in private markets from accredited investors, without registering with the Commission as broker-dealers.
The Committee notes that currently “regulatory uncertainty regarding finders creates additional barriers to raising capital.”
With this in mind, SBCFAC proposed the following principles for the Commission to act on:
- Finders play an important role in facilitating the flow of capital to small and emerging businesses, and current regulations discourage finder activity.
- There is a strong need for regulatory clarity to separate finder activity from broker-dealer services, and a limited exemption from broker-dealer regulations should be adopted for finders that assist companies.
- Federal preemption of state regulations should be taken into account when evaluating the effectiveness of any potential regulation or exemption.
- Past Commission proposals/preliminary rulemaking that limited finders’ ability to communicate with investors or make any comments regarding investment terms were overly restrictive, and any re-proposed regulation must allow finders to communicate with potential investors about the nature of the issuer and financing terms.
- Regulations requiring disclosure of the identity of finders, fees paid to finders, and relationships between the finder and the issuer or other investors would be appropriate, if not unduly burdensome. Any registration process that finders must comply with should be minimal and open to non-professional participants to complete without needing the assistance of professional advisors.
- Regulations that require oversight or responsibility of discovery activity by issuers may be appropriate, if not unduly burdensome.
SBCFAC reiterated recommendations issued by a previous Committee in 2020:
- The framework should be kept simple.
- The framework should keep bad actors out.
- The Commission should consider requiring the submission of a notice for all finders that includes information on fees charged for finders’ services.
- The Commission should work with state securities regulators to provide additional certainty to market participants through coordination between states and the Commission.
- It is important for finders and issuers to know the rules regarding how finders can assist in capital formation for small businesses.
- The Commission should consider introducing a general exemption for finders for proposals below a certain size.
- The Commission must consider the issue of fees payable to finders, including the reasonableness of finders’ fees and/or any limitations on the amount of finders’ fees.
- The Commission should clarify prohibited and permitted activities.
During the Biden Administration, the SEC has done little to support capital formation and innovation and has pursued unclear political goals, while the Commission under President Biden’s leadership Paul Atkins He has demonstrated a knack for taking decisive action in carrying out the SEC’s mission. There is a good chance that the SEC will consider SBCFAC’s recommendations and propose rule changes that would improve the capital formation environment.
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