SEC Proposes a Big Exemption to Assist Small Businesses in Raising Much-Needed Capital

The COVID-19 pandemic has decimated small business at an unprecedented rate and sent the U.S. unemployment rate to its highest level since the Great Depression, reaching a high of 14.7% in April 2020.

Millions of people have lost their jobs as a result of the largest decline in active business owners since the National Bureau of Economic Research (NBER) began keeping records 100 years ago. The number of active business owners in the U.S. fell by 3.3 million – an astounding 22% – across almost all industries between February and April of this year.

How bad were things for small business during those three months?  African-American businesses experienced a 41% drop in ownership. Statistics for the Hispanic (32%) and Asian (26%) business communities were also alarming.

The SEC Proposes a Potential Lifeline

Many small businesses are still suffering. Others are facing an uncertain future because of the many financial and funding complications the pandemic has created. That’s why recent action taken by the U.S. Securities and Exchange Commission (“SEC”) could help some businesses keep their doors open.

On October 7, 2020, the SEC voted to propose a conditional exemption from broker registration requirements for “Finders;” those who assist issuers with raising capital in private markets from accredited investors without registering as brokers under Section 15 of the Securities Exchange Act of 1934. Read the press release and a fact sheet to the proposed exemption here.

The SEC proposed rule, which passed by a 3-2 vote and is subject to a 30-day comment period ending on or about November 15, 2020, would create two classes of exempt Finders – Tier I Finders and Tier II Finders.

Both classes would be subject to several conditions related to the scope of their respective activities, and both classes would be permitted to accept transaction-based compensation under the terms of the proposed exemption.

Providing Clarification and Opportunity

Federal and state securities laws generally require that persons who engage in securities brokerage activity be registered as brokers, but the regulatory status of persons who help bridge the funding gap between issuers and investors has been murky, at best. The SEC proposal clarifies at what point someone with a robust list of contacts is willing, for a fee, to assist Issuers in finding investors and require broker-dealer registration.

For years, perceived regulatory uncertainty made some parties reluctant to raise capital for small private businesses. The entrepreneurs of small businesses, in turn, have faced strong headwinds when trying to identify and contact investors who can provide much-needed investment capital. The proposed exemption expands who can qualify as a Finder and really opens up that market. It also opens up the world of compliance for people who act as Finders.

Important Differences Between Tier I and Tier II Finders

The SEC has posted an educational video and a detailed chart showing a comparison of some of the permissible activities, requirements, and limitations for Tier I Finders, Tier II Finders, and registered brokers.

In brief, Tier I Finders would be limited to providing contact information of potential investors in connection with only a single capital raising transaction by a single issuer over a 12-month period.  A Tier I Finder could not have any contact with a potential investor about the issuer.

A Tier II Finder could solicit investors on behalf of an issuer, but the solicitation-related activities would have a number of limitations that are listed in the educational resources provided by the SEC.

COVID-19 and the need for businesses to have an opportunity for funds other than stimulus, PPP or SBA loans or other government funds is going to increase the pressure to adopt the proposed rules. This proposed rule represents another much-needed option for struggling businesses to raise capital in order to continue operations during these difficult times.

Stay Ahead of the Curve

Jacko Law Group strongly suggests that financial advisors, broker-dealers, and their respective legal and compliance departments carefully and thoroughly review the many specifics of the SEC proposal.

Our experienced professionals can assist in updating your firm’s policies and procedures to cover a slew of related new responsibilities and required disclosures which could take effect in a matter of weeks. Contact us at 619.298.2880 or to schedule a consultation.

One Response

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