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SEC Proposes Allowing Unregistered ‘Finders’ to Solicit Investors

By Alex Padalka October 8, 2020

The SEC voted on Wednesday to propose an exemption that allows so-called “finders” not registered with the regulator or Finra to solicit and recruit investors on behalf of issuers and earn commissions on those activities. 

SEC commissioner Jay Clayton says the proposed exemption would help small businesses for which “private markets may be their only source of growth capital.” 

“[S]maller businesses and their investors frequently encounter challenges connecting with each other in the private market, particularly in regions that lack established robust capital-raising networks,” Clayton says in a statement. “In these areas, ‘finders’ can play an important and discrete role in bridging the gap between small businesses that need capital and investors who are interested in supporting emerging enterprises.”

Clayton says the proposed exemption would only apply to “solicitation of investors that are accredited investors, or that the finder has a reasonable belief are accredited investors.” 

Meanwhile, SEC commissioner Hester Peirce, a Republican appointee, says that the exemption would help small businesses, particularly early-stage companies, tap funds in a cost-efficient way by connecting them with finders, since “enlisting the participation of a registered broker-dealer is not a realistic possibility for companies seeking to raise relatively small sums.”

SEC Commissioner Caroline Crenshaw, a Democrat appointee,  issued a dissent on the proposal, arguing that under the current approach, “issuers of any size would be permitted to employ finders to raise unlimited amounts of capital, outside of the broker-dealer regulatory regime.” 

“I cannot support deliberately expanding markets that even our expert staff cannot accurately assess or analyze,” Crenshaw says in a statement. “[I]n an area of the securities markets that is already prone to fraud, the proposed approach would eliminate the important investor protections the established broker-dealer framework provides.”

The exemption has a 30-day comment period following its publication in the Federal Register, the SEC says. 

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