September 24, 2015
On September 23, 2015, the Securities and Exchange Commission Advisory Committee on Small and Emerging Companies published its recommendation "regarding the regulation of finders and other intermediaries in small business capital formation
transactions." In attempting to bring clarity to this area, which has become overly reliant on ad hoc No-Action Letters and, as a consequence, left many smaller deals languishing for lack of interest, the Advisory Committee does a great service for a frequently under-served corporate finance sector. On the other hand, since the low-end of the spectrum is frequently the playground of scam artists seeking to push crapola, there will likely need to be some careful deliberation about the consequences of enacting the recommended changes. Notwithstanding, the time has come to clean up the regulations attendant to finder's fees and to make it easier for legitimate deals to find qualified investors.
SIDE BAR: For an example of how tortured the facts and the considerations have been for finder's seeking clearance for their introductions, consider the 1991 SEC No-Action Letter to Paul Anka.
As set forth in the Advisory Committee Recommendation:
- The Commission take steps to clarify the cunent ambiguity in broker-dealer regulation by
determining that persons that receive transaction-based compensation solely for providing names
of or introductions to prospective investors are not subject to registration as a broker under the
Securities Exchange Act.
- The Commission exempt intermediaries that are actively involved in the discussions, negotiations
and structuring, as well as the solicitation of prospective investors, for private financings on a
regular basis from broker registration at the federal level, conditioned upon registration as a
broker under State law.
- The Commission spearhead a joint effort with the North American Securities Administrators
Association and the Financial Industry Regulatory Authority to ensure coordinated State
regulation and adoption of measured regulation that is transparent, responsive to the needs of
small businesses for capital, proportional to the risks to which investors in such offerings are
exposed, and capable of early implementation and ongoing enforcement.
- The Commission should take immediate intermediary steps to begin to address issues regarding
the regulation of intetmediaries in small business capital formation transactions incrementally
instead of waiting until development of a comprehensive solution.
READ the FULL TEXT Advisory Committee Recomendation