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SEC Proposed Exemption to Broker Registration Rules

There has been a consistent gray area and longstanding confusion in securities law when it comes to unregistered intermediaries, commonly known as Finders, receiving commissions for soliciting investors on behalf of companies. The U.S Securities and Exchange Commission (SEC) has recently proposed a conditional exemption to the broker registration rules that would permit these intermediaries to find investors for small companies who face limited financing options. This conditional exemption was proposed by a 3-2 vote on October 7, 2020, after many years of industry participants calling for clarity regarding Finders’s ability to receive compensation for securities and sales. Previously, the SEC decided whether a Finder crossed into unregistered broker-dealer territory (and this violated securities laws) on a case-by-case basis.

The exemption proposed by the SEC would create two new classes of Finders: Tier I Finders and Tier II Finders. These tiers will be differentiated by the level, extent, and frequency of their activities on behalf of the issuer. Tier I Finders and Tier II Finders would both be permitted to accept compensation based on their transactions. To qualify for the proposed exemption, however, each tier of Finder would need to comply with certain conditions associated with their tier. Tier II Finders will have to comply with more stringent conditions.

Details of the Proposed Exemption to Broker Registration

As determined by the SEC, the exemption would only apply to certain private offerings of securities (Permitted Offerings). The activities of both Tier I and Tier II Finders would only be considered exempt if in connection with offerings that meet the following conditions.

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