SEC Reopens Discussion On Small Biz ‘Finder’Exemption
The U.S. Securities and Exchange Commission on Monday signaled that it could revive an abandoned 2020 proposal to exempt some individuals from agency oversight in order to help small businesses raise capital, a proposal that received criticism from a key trade group and a fellow regulator at the time it was issued.
The SEC on Monday announced the agenda for the July 22 meeting of its small business capital formation advisory committee, where staff from the agency’s Division of Trading and Markets plan to discuss a proposal put forth under the first Trump administration that was never adopted.
The proposal would have exempted some individuals, known as “finders,” from registering as brokers if they were hired to locate investors for small companies. The Republicans who led the commission at the time said the exemption would make it easier for small businesses to raise capital and would provide regulatory clarity in an area in which there has been long-standing uncertainty.
Democrats on the commission, including current Commissioner Caroline Crenshaw, objected to the issuance of the proposal, however, arguing that it would erode investor protections.
It wasn’t immediately clear if the SEC plans to reintroduce the proposal now that Republicans have retaken power at the agency, or if the proposal would remain the same if it was reintroduced. Anagency spokesperson declined to comment Monday.
But the meeting agenda noted that the small business committee “will explore potential principles, frameworks, conditions and safeguards that could permit certain ‘finders’ to engage in limited capital-raising activities.”
It also noted that Market Division staff will “share certain feedback” from commenters with the committee.
The proposal received a little over 100 comments in late 2020 from groups as diverse as theSecurities Industry and Financial Markets Association, the Financial Industry Regulatory Authority andPublic Investors Advocate Bar Association. SIFMA, FINRA and the bar association all pushed back against the proposed exemptions.
SIFMA, which represents the broker-dealer industry, said at the time that the proposal “may not be the appropriate approach to achieve the commission’s objectives” of capital formation and clarity.
The securities industry association said the proposal was a “de facto rule” without going through amore robust rulemaking process. It argued that the proposal, if adopted, would leave the SEC without the ability to ensure that the exempt “finders” were accurately communicating with prospective investors.
“Authorizing this type of uninformed solicitation risks creating a market perception that people soliciting investments lack knowledge and information about the securities and issuers for which they are soliciting, and that such solicitations are unreliable,” SIFMA said.
FINRA, the body that regulates broker-dealers, also raised concerns that the proposal would”reduce public confidence in the securities markets” and offered to rewrite its own rules to make things easier for those assisting small companies in raising capital.
“A goal of a private offering regulatory regime should be to make it easier for intermediaries such as finders to assist small businesses in raising early stage capital,” the regulator said. “But the commission should seek to achieve this goal through a narrowly tailored approach that protects investors and issuers, and that maintains public confidence in this business model.”
The Public Investors Advocate Bar Association, whose member attorneys represent investors in disputes with broker-dealers, was more forceful in its opposition — arguing that the exemption would have a “devastating” impact on investor protection.
In an email to Law360 on Monday, PIABA President Adam Gana of Gana Weinstein LLP, said the criticism still stands.”As we noted in our original comment letter, the exemption would create a significant loophole in the regulatory framework designed to protect investors,” Gana said. “It would permit unregistered and largely unsupervised individuals to engage in broker-dealer activities.”
SEC Chair Paul Atkins, who was nominated by President Donald Trump and joined the agency in April, has made capital formation a central focus of his agenda.
He has promised, for example, to reassess Biden-era rules governing special purpose acquisition companies as part of a broader policy of increasing public listings and to possibly provide an“innovation exemption” for certain crypto companies.
Atkins also spoke before the last small business committee meeting in May, discussing the central role the committee would play under his leadership.
“This committee’s voice will be critical over the next few years, as I intend for the commission to focus on providing meaningful pathways for entrepreneurs to obtain the capital that they need to execute their innovative ideas and grow their companies in both the private and public markets,”Atkins said.
“At the same time, persons that provide such capital must be able to continue to depend on effective enforcement against fraudulent activities,” the chair added.–
Additional reporting by Tom Zanki. Editing by Rich Mills.