The U.S. Securities and Exchange Commission Proposes Rule to Exempt Intermediary Securities Brokers from Registration.

2024-09-27 01:08:49

On October 7, 2020, the U.S. Securities and Exchange Commission (SEC) voted to propose a conditional exemption (hereinafter referred to as the "Proposal"). If adopted, the Proposal would permit certain individuals who are not registered as securities brokers or associated with a registered securities broker to receive transaction-based compensation in connection with the referral of private placement transactions involving accredited investors. The SEC stated that this proposed registration exemption aims to assist small businesses in raising capital.

The Proposal intends to provide a non-exclusive exemption from the broker registration requirements of Section 15(a) of the Securities Exchange Act of 1934 (hereinafter referred to as the "Exchange Act") for "Tier I Finders" and "Tier II Finders." Both tiers of finders must meet the following exemption requirements:
The issuer is not required to file reports under Section 13 or 15(d) of the Exchange Act;
The issuer is conducting the securities offering in reliance on an exemption from the Securities Act of 1933 (hereinafter referred to as 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 under the U.S. Securities Act, 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, which includes a description of the services provided and the compensation;
The finder is not an associated person of a registered broker-dealer;
The finder is not disqualified under Section 3(a)(39) of the Exchange Act at the time of participation; and
The finder's participation does not include the following activities: (i) structuring the transaction or negotiating the terms of the transaction; (ii) handling customer funds or securities, or binding the issuer or investor; (iii) participating in the preparation of any transaction materials; (iv) performing any independent analysis of the transaction; (v) engaging in any due diligence activities; (vi) providing financing for the transaction; or (vii) providing advice as to the valuation or financial advisability of the investment.

According to the Proposal, Tier I Finders are limited to providing contact information of potential investors for a single offering and a single issuer during a 12-month period. Tier I Finders are not permitted to represent the issuer in any communication with potential investors.

• Tier II Finders can engage in a broader range of private placement referral activities on behalf of the issuer, without the restriction of only one offering within 12 months, and receive the proposed broker registration exemption, but their permitted activities are limited to:
  Identifying, screening, and contacting potential investors;
  Distributing issuer-provided materials to investors;
  Discussing any issuer information included in the offering materials, provided that the Tier II Finder does not provide advice on the valuation or advisability of the investment; and
  Arranging or participating in meetings with the issuer and investors.

• Tier II Finders seeking the registration exemption must satisfy certain disclosure and other conditions, including:
  The name of the Tier II Finder and the issuer and a description of the relationship with the issuer;
  A statement that the finder will receive transaction-based compensation for the referral to the issuer and a description of the compensation arrangement;
  Any material conflicts of interest; and
  A statement that the Tier II Finder is acting as the issuer's agent, is not associated with a registered broker-dealer, and is not acting in the best interests of the investor.

The above disclosures may initially be provided orally but must be provided in writing before the investor invests in the issuer's securities. Additionally, the Tier II Finder must obtain a dated written acknowledgment from the investor at or before the time of investment confirming receipt of the disclosures.

The SEC accepted comments on the Proposal until November 12, 2020.