For small Israeli companies looking to raise capital from US investors and finders assisting them in these efforts, broker registration requirements have always been a challenging area to navigate. Until now there was little clarity for issuers and finders, as to whether a finder identifying or soliciting investors on behalf of an issuer could do so without being registered as a broker. The US Securities and Exchange Commission (the “SEC”) voted to propose a new limited exemption from broker registration requirements for finders assisting small companies to raise funds in private markets.
In an effort to assist small businesses in their capital formation initiatives, the proposed exemption would allow natural persons to engage in certain limited activities vis-à-vis accredited investors, without having to register with the SEC as brokers.
Under the proposed exemption, natural persons can receive transaction-based compensation for acting as “finders” for non-reporting private companies and interact with accredited investors in the context of primary exempt offerings. Such finders need to provide their services pursuant to a written agreement specifying both the services provided and associated compensation. Depending on the activities a finder engages in, it can be categorized as “Tier 1 Finder” or “Tier 2 Finder”:
Tier 1 Finders: can only provide investor contact information to the issuer and are limited to participating in one capital raising transaction by a single issuer within a year.
Tier 2 Finders: can engage in a wider range of activities, such as:
- Identify, screen and contact potential investors,
- Distribute issuer offering materials to investors,
- Discuss issuer information included in the offering materials,
- Arrange and participate in meetings.
Tier 2 Finders are not limited by a number of capital raising transactions they can be involved in and thus are subject to heightened disclosure requirements – prior to or at the time of solicitation, they need to disclose their role and compensation and further, prior to or at the time of any investment, they must obtain from the investor a written certification of receipt of such disclosure.
Neither Tier 1 nor Tier 2 Finders can be involved in the following:
- Engage in general solicitation,
- Structure the transaction or negotiate the terms of the offering,
- Participate in preparation of sales materials,
- Perform independent analysis of the sale, engage in due diligence, or advise as to valuation or financial advisability of the investment,
- Handle customer funds or securities or bind either party.
If adopted, this proposal will provide much needed clarity for finders who can assist smaller issuers in meeting their capital raise needs. For small Israeli companies looking for funding in the US that would be a welcome development.
Notice of Proposed Exceptive Order Granting Conditional Exemption from the Broker Registration Requirements of Section 15(a) of the Securities Exchange Act of 1934 for Certain Activities of Finders, https://www.sec.gov/rules/exorders/2020/