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United States regulations currently impose significant restrictions on using a “finder” to raise private equity from U.S. investors and on the ability of companies to pay finder’s fees, or transaction based compensation, to unlicensed advisors who assist them with locating investors.  Generally, under U.S. rules, finders who assist in raising equity from investors in private placements must be registered as a broker-dealer under Section 15 of the Securities Exchange Act of 1934.  The prohibition on using unregistered finders to raise capital also applies to Israeli companies raising funds from U.S. investors. This can be burdensome on businesses who rely on this source of potential capital, often from small to medium sized private investors. The SEC recently proposed a limited exemption to the broker-dealer registration requirements for finders in certain private placement transactions which, if approved, may allow unregistered finders to assist companies with raising equity investments and legally receive finders fees for their services.

SEC Proposes Exemption from Registration for Finders

On Oct. 7, 2020, the U.S. Securities and Exchange Commission (SEC) held an open meeting and issued a notice proposing a conditional exemption from securities broker-dealer registration under Section 15 of the Securities Exchange Act of 1934 for “finders” who assist entrepreneurs and issuers in raising capital through private placements sold to accredited investors (the proposal). The proposal would create two tiers of finders who, if all conditions are satisfied, would allow such finders to be exempt from Section 15 registration requirements. They are:

  • Tier I Finder: A Tier I Finder would be limited to providing to an issuer or its agent contact information of potential investors in connection with only a single capital-raising transaction by a single issuer in a 12-month period. A Tier I Finder could not have any contact with potential investors about the issuer.
  • Tier II Finder: A Tier II Finder could solicit investors on behalf of an issuer, but the solicitation-related activities would be limited to: (i) identifying, screening, and contacting potential investors; (ii) distributing issuer offering materials to investors; (iii) discussing issuer information included in any offering materials, provided that the Tier II Finder does not provide advice as to the valuation or advisability of the investment; and (iv) arranging or participating in meetings with the issuer and investor. A Tier II Finder must provide potential investors, prior to or at the time of the solicitation, disclosures of the Tier II Finder’s role and compensation. A Tier II Finder would also be required to obtain from the investor prior to or at the time of any investment a written acknowledgement of the investors’ receipt of the necessary disclosures.

Assuming all conditions are satisfied by a “finder,” both Tier I and Tier II Finders can receive transaction-based (i.e., commission) compensation for his or her finder services without registering as a securities broker or dealer or an associated person of a securities broker or dealer. However, no finder may be involved in structuring the transaction or negotiating the terms of the offering, handling customer funds or securities, participating in the preparation of any sales materials, performing any independent analysis of the sale, performing any due diligence activity, assisting or providing financing for investors’ purchases, or providing an evaluation of the advisability of the investment.

Read the full GT Alert