Finders and Unregistered Broker-Dealers: Understanding the Risks and Recent Developments

Description

On Oct. 7, 2020, the SEC proposed a conditional exemption for finders, which would operate as a nonexclusive safe harbor from the broker registration requirements of Section 15(a) of the Securities Exchange Act of 1934. The proposed exemption would permit natural persons to engage in certain limited activities on behalf of issuers with private placement offerings. The SEC received over 90 comment letters overwhelmingly critical of the proposal, including state regulators. Unfortunately, no further action has been taken with respect to the proposal, but it remains instructive on the status of brokers and finders.

More recently, on Mar. 28, 2022, the SEC proposed two rules that would clarify the meaning of certain terms in the statutory definitions of "dealer" and "government securities dealer" under, respectively, Sections 3(a)(5) and 3(a)(44) of the Exchange Act. The rules would encompass liquidity providers in the markets--firms that were previously relying on the trader exemption.

Fund managers and companies can be subject to SEC enforcement actions for aiding and abetting a finder's violation of the broker-dealer registration requirements. Besides SEC sanctions, the use of an unregistered broker-dealer brings the risk of rescission under federal and state securities laws. Involving finders in capital raising thus carries significant risks and there is no safe harbor or clear distinction of a finder's duties in the securities laws.

Listen as our authoritative panel of securities practitioners discusses legal pitfalls for securities issuers using unregistered "finders" to solicit capital and the SEC's position on unregistered brokers' permissible activities.