Finders May Finally Be Keepers: SEC Proposes Rules Allowing for Unregistered Broker-Dealers to Participate in Capital-Raising Transactions Under Certain Circumstances
The ability to raise capital is one of the most critical challenges facing small businesses in the U.S. today. Capital can allow for exponential growth of a well-run startup with a good idea, but the lack of capital is the death knell for many others. While many small companies initially rely on friends and family for funding, there has perennially been a gap between raising money from those in your immediate circle and working with investment bankers who are registered broker-dealers for larger rounds of funding. In years past, unregistered finders stepped in to fill this gap despite the legal challenges involved. The role and responsibilities that a finder can legally undertake is a gray area. To the chagrin of their lawyers, companies often “looked the other way” and risked sanctions, possible rescission of offerings and other penalties in order to get the capital they so desperately sought. The problem of unregistered finders has been discussed by the Securities and Exchange Commission (SEC) for decades but, until the new rules proposed by the SEC on October 7, 2020, they did little to provide relief to small companies seeking to raise private placement funds through the use of finders.