FinReg + Policy Watch
August 3, 2020

Regulating Unregistered Finders: SEC Looks to Dip its Toe in Murky Waters

Raising capital can be a significant challenge for private companies, especially issuers that typically would not draw the attention of investment banks such as early stage or emerging growth companies. One of the highest hurdles these companies face is simply identifying prospective sources of capital. Registered securities brokers can assist in this task. Unfortunately, issuers often find it difficult to pay the fees charged by brokers or even to find a broker with prospective investor contacts likely to bear fruit for the offering. It may be permissible for an issuer’s personnel to assist it with its securities offering or for unregistered “M&A brokers” to assist in the purchase and sale of a company, but available exemptions or relief from broker status are limited in scope.[1]

Instead of using a registered broker or in-house personnel, private companies often consider using a so-called “finder.” Typically, a finder will help private companies identify prospective investors in return for compensation. At first glance, this sounds like a great alternative for a private company seeking to raise capital. However, the regulatory status of finders is a longstanding murky area under the U.S. federal securities laws.

The SEC has not formally addressed this issue, despite decades of prodding from private issuers, industry practitioners,[2] and more recently the SEC’s own Small Business Capital Formation Advisory Committee.

In the midst of the SEC’s inaction on this issue (and, not to mention, a global pandemic) the New York State Attorney General (NYSAG) unveiled a package of related reform proposals intended to protect the public from fraudulent exploitation in the offering and sale of securities.[5] Among other things, if adopted, the proposals would define “Finder” and would impose registration and exam requirements on these individuals.[6] If adopted, the proposals could significantly affect capital raising in and from New York.

A long form version of this post will provide a brief discussion of the practice of using unregistered “finders” in the context of a private securities offering. We provide background on the process, discuss various risks and considerations, and address how recent developments in New York may change private issuers’ approaches in this murky area of the regulatory landscape. Read more here.

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