Regulatory Update: SEC – Unregistered Broker-Dealer?  No Problem!...Sometimes

For around 80 years, it has been axiomatic that it is forbidden to pay anyone not registered as a broker-dealer transaction fees for soliciting investors. On October 7, 2020, the U.S. Securities and Exchange Commission voted1 to upend that history and permit such payments to so-called “finders”.

The proposal, which is open for comment, creates two different tiers of finders.  Each have differing conditions, which are particularly relevant to private fund issuers. Tier I Finders do not communicate with investors, but provide contact information regarding potential investors to an issuer in connection with a single raise in a single year. Among other conditions, the issuer (think a private fund) (a) cannot be a Section 13 or Section 15(d) filer, which is the case for many private equity funds, and (b) must be relying on a securities registration exemption (e.g. Reg D). Tier II Finders can actively solicit investors for the issuer, but, in addition to the conditions for Tier I Finders, they must also make certain investor disclosures, including regarding their role and compensation.


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