The Securities and Exchange Commission (“SEC”) proposed a new limited, conditional exemption (“Proposed Exemption”) to permit natural persons (“Finders”) to engage in limited fundraising activities involving accredited investors without registering with the SEC as brokers.
Tier I and Tier II Finders
If adopted, the Proposed Exemption would create two classes of exempt Finders under Section 15(a) of the Exchange Act. Both tiers of Finders would be subject to conditions based on the scope of their respective activities, and both would be permitted to accept transaction-based compensation.
Tier I Finders: A Tier I Finder would be limited to providing 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 a potential investor about the issuer.
Tier II Finders: 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.
Additional information regarding the difference between Tier I Finders and Tier II Finders is available here.
Exemption Qualification Conditions
To qualify for exemption, Finders would have to meet the following conditions:
- the issuer is not required to file reports under Section 13 or Section 15(d) of the Exchange Act;
- the securities offering relies on an applicable exemption from registration under the Securities Act;
- the Finder does not engage in general solicitation;
- the potential investor is an “accredited investor” as defined in Rule 501 of Regulation D or the Finder has a reasonable belief that the potential investor is an “accredited investor”;
- the Finder provides services pursuant to a written agreement with the issuer that includes a description of the services provided and associated compensation;
- the Finder is not an associated person of a broker-dealer; and
- the Finder is not subject to statutory disqualification, as that term is defined in Section 3(a)(39) of the Exchange Act, at the time of his or her participation.
Restrictions on Actions for Finders
Finders could not (i) be involved in structuring the transaction or negotiating the terms of the offering; (ii) handle customer funds or securities or bind the issuer or investor; (iii) participate in the preparation of any sales materials; (iv) perform any independent analysis of the sale; (v) engage in any “due diligence” activities; (vi) assist or provide financing for such purchases; or (vii) provide advice as to the valuation or financial advisability of the investment.
Additional Conditions for Tier II Finders
Since Tier II Finders could participate in a wider scope of activity and could engage in more offerings with issuers and investors, the SEC has proposed additional, heightened requirements, including requiring appropriate disclosures of the Tier II Finder’s role and compensation prior to or at the time of solicitation and dated, written acknowledgement of receipt of the required disclosures.
There will be a 30-day comment period for the Proposed Exemption once its published in the Federal Register.
The Proposed Exemption will provide welcome clarity and flexibility to the private fund industry. As with the recent amendments to the Accredited Investor definition, the SEC is expanding fund managers’ ability to connect with prospective investors. Greyline will continue to monitor the status of the Proposed Exemption as it continues through the SEC’s rulemaking process.
