[Federal Register Volume 85, Number 198 (Tuesday, October 13, 2020)]
[Notices]
[Pages 64542-64551]
[FR Doc No: 2020-22565]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-90112; File No. S7-13-20]

Notice of Proposed Exemptive 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

AGENCY: Securities and Exchange Commission.

ACTION: Notice of proposed exemptive order; request for comment.

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SUMMARY: Pursuant to Sections 15(a)(2) and 36(a)(1) of the Securities
Exchange Act of 1934 (``Exchange Act''), the Securities and Exchange
Commission (``SEC'' or ``Commission'') is proposing to grant exemptive
relief to permit natural persons to engage in certain limited
activities on behalf of issuers (``Finders''), without registering as
brokers under Section 15 of the Exchange Act. The proposed exemption
provides for two classes of Finders, Tier I Finders and Tier II
Finders, with corresponding conditions as described below.

DATES: Comments should be received on or before November 12, 2020.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/exorders.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-13-20 on the subject line.

Paper Comments

     Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.

All submissions should refer to File Number S7-13-20. This file number
should be included on the subject line if email is used. To help the
Commission process and review your comments more efficiently, please
use only one method. The Commission will post all comments on the
Commission's internet website (http://www.sec.gov/rules/exorders.shtml). Comments also are available for website viewing and
printing in the Commission's Public Reference Room, 100 F Street NE,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. All comments received will be posted without
change. Persons submitting comments are cautioned that we do not redact
or edit personal identifying information from comment submissions. You
should submit only information that you wish to make available
publicly.

FOR FURTHER INFORMATION CONTACT: Emily Westerberg Russell, Chief
Counsel; Joanne Rutkowski, Assistant Chief Counsel; Timothy White,
Senior Special Counsel; Geeta Dhingra, Special Counsel; and Darren
Vieira, Special Counsel, Office of Chief Counsel, Division of Trading
and Markets, at<PHONE_NUMBER>, Securities and Exchange Commission, 100
F Street NE, Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION:

I. Introduction

    The Commission's mission includes facilitating capital formation--
not only for public companies, but also for the small businesses that
are active participants in our private markets. Our dynamic markets and
economy significantly benefit from a robust pipeline of new small
businesses, which create the majority of net new jobs in the United
States \1\ and greatly contribute to innovation.\2\ Small and emerging
companies--from start-ups seeking their initial seed funding to
businesses on a path to become a public reporting company--require
capital to grow and scale.\3\ One of the ways that

small businesses may seek to access critical capital needed to grow and
scale is through offerings conducted in reliance on an exemption from
registration under the Securities Act of 1933 (``Securities Act'').\4\
The exempt market supports the capital needs of many small companies
that contribute substantially to our economy.\5\
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    \1\ See U.S. Small Business Administration Office of Advocacy,
Frequently Asked Questions (Sept. 2019), available at https://cdn.advocacy.sba.gov/wp-content/uploads/2019/09/24153946/Frequently-Asked-Questions-Small-Business-2019-1.pdf.
    \2\ See, e.g., Ufuk Akcigit and William R. Kerr, ``Growth
through Heterogeneous Innovations,'' Journal of Political Economy
126:4 (Aug. 2018), available at https://www.journals.uchicago.edu/doi/full/10.1086/697901 (demonstrating that the ``relative rate of
major inventions is higher in small firms'' due to the ``outcome of
innovation investment choices by firms'').
    \3\ See Facilitating Capital Formation and Expanding Investment
Opportunities by Improving Access to Capital in Private Markets,
Release No. 33-10763 (Mar. 4, 2020) [85 FR 17956 (Mar. 31, 2020)]
(``Harmonization Proposal'') (proposing amendments to facilitate
capital formation and increase opportunities for investors by
expanding access to capital for entrepreneurs across the United
States and noting that the significance of the exempt securities
markets has increased over time both in terms of the absolute
amounts raised and relative to the public registered markets).
    \4\ See Harmonization Proposal at 17957.
    \5\ Id.
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    Small business investors play a critical role in fostering the
growth and success of small companies.\6\ For example, investors can
provide expertise as well as financial capital to support the
businesses' strategic growth.\7\ Observers have noted, however, that
small businesses frequently encounter challenges connecting with
investors in the exempt market, particularly in regions that lack
robust capital raising networks.\8\ According to the 2017 Treasury
Report, ``[f]or a small business seeking to raise capital, identifying
and locating potential investors can be difficult. It becomes even more
challenging if the amount sought (e.g., less than $5 million) is below
a level that would attract venture capital or a registered broker-
dealer, but beyond the levels that can be provided by friends and
family and personal financing. The number of registered broker-dealers
has been falling, and few registered broker-dealers are willing to
raise capital in small transactions.'' \9\
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    \6\ Id.
    \7\ See Final Report of the Securities and Exchange Commission
Advisory Committee on Small and Emerging Companies (``ACSEC'')
(Sept. 2017), available at https://www.sec.gov/info/smallbus/acsec/acsec-final-report-2017-09.pdf.
    \8\ See id. See also U.S. Department of Treasury, A Financial
System that Creates Economic Opportunities: Capital Markets (Oct.
2017), available at https://home.treasury.gov/system/files/136/A-Financial-System-Capital-Markets-FINAL-FINAL.pdf (``2017 Treasury
Report'').
    A recent report shows that in 2019, 77% of venture capital
funding in the United States was raised by companies in just three
states, California, New York, and Massachusetts. See PWC
MoneyTreeTM Report, Q4 2019, available at https://www.pwc.com/us/en/industries/technology/assets/pwc-moneytree-2019-q4-final.pdf.
    \9\ 2017 Treasury Report at 43-44. See e.g., Report and
Recommendations of the American Bar Association Business Law Section
Task Force on Private Placement Broker-Dealers (``ABA Task Force'')
(June 2005), available at https://www.sec.gov/info/smallbus/2009gbforum/abareport062005.pdf (``ABA Task Force Report'') (stating
that small issuers are almost ``never interesting'' to professional
capital and will seldom be able to attract fully licensed members to
participate in offerings of less than $5 million); Gregory C.
Yadley, ``Notable by Their Absence: Finders and Other Financial
Intermediaries in Small Business Capital Formation,'' (June 2015),
available at https://www.sec.gov/info/smallbus/acsec/finders-and-other-financial-intermediaries-yadley.pdf (``Funding of start-up and
new companies is often sought in amounts of $100,000 or less, and
rarely more than $5 million. Accordingly, these offerings are not of
interest to many professional investors such as venture capital or
private equity funds.'').
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    In areas that lack robust venture capital (``VC'') \10\ and angel
investor \11\ networks, so-called ``finders,'' who may identify and in
certain circumstances solicit potential investors, often play an
important and discrete role in bridging the gap between small
businesses that need capital and investors who are interested in
supporting emerging enterprises.\12\ Finders may also help bridge gaps
between traditionally underrepresented founders, such as women and
minorities \13\ and VC and start-up capital.\14\
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    \10\ Venture capital funds generally invest capital directly in
portfolio companies for the purpose of funding the expansion and
development of the companies' business, with the goal of eventually
either selling the companies or taking them public. See Exemptions
for Advisers to Venture Capital Funds, Private Fund Advisers With
Less Than $150 Million in Assets Under Management, and Foreign
Private Advisers, Release No. IA-3222 (Jun. 22, 2011) [76 FR 39646
(Jul. 6, 2011)] (``VC Fund Adviser Release''). Many advisers to VC
funds provide managerial assistance to the funds' portfolio
companies. See VC Fund Adviser Release at 39661.
    \11\ ``Angel investors'' are generally high net worth
individuals who provide financial backing for early-stage
businesses. They typically invest their own funds directly in a
business located in close proximity, often using convertible debt.
See Office of the Advocate for Small Business Capital Formation,
Annual Report for Fiscal Year 2019, available at https://www.sec.gov/files/2019_OASB_Annual%20Report.pdf (``OASB Report'') at
18.
    \12\ See id. at 44-45. See also comments of Gregory Yadley,
Partner, Shumaker, Loop & Kendrick, LLC, at the Meeting of the Small
Business Capital Formation Advisory Committee meeting (May 8, 2020),
available at https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-050820.pdf, transcript at 112-113 (``Particularly these
days, where companies are going to become even more desperate for
money and we are loosening up so many ways for people to be able to
raise money, there is still a disconnect between issuers who need a
little bit of money and accredited investors who are willing to
invest. . . .'').
    \13\ See Transcript of the 39th Annual SEC Government-Business
Forum on Small Business Capital Formation available at https://www.sec.gov/file/06182020-small-business-forum-transcript.pdf.
    \14\ See OASB Report at 26 and 30. See also Presentation at Feb.
4, 2020 Small Business Capital Formation Advisory Committee meeting
by James Gelfer, Senior Strategist, Lead Venture Analyst, PitchBook,
available at https://www.sec.gov/spotlight/sbcfac/2020-02-04-presentation-pitchbook-venture-climate.pdf at 13 (showing that 22.8
percent of VC deals and 14.2% of VC dollars in 2019 involved
companies with at least one female founder and 6.8% of VC deals and
2.7% of VC dollars in 2019 involved companies with all female
founders.; Banerji, Devika & Reimer, Torsten, Startup Founders and
Their LinkedIn Connections: Are Well-Connected Entrepreneurs More
Successful? 90 Computers in Hum. Behavior 46 (2019) (finding that
social connectedness of founders was the best predictor of funds
raised); Redd, Tammi C. and Wu, Sibin, ``Gender Differences in
Acquiring Business Support from Online Social Networks'' (2020),
available at https://doi.org/10.28934/jwee20.12.pp22-36
(highlighting gender differences between social networks and the
process of creating network ties for men and women); Looze, Jessica
and Desai, Sameeksha, ``Challenges Along the Entrepreneurial
Journey: Considerations for Entrepreneurship Supporters'' (2020)
available at https://ssrn.com/abstract=3637048 (noting that aspiring
entrepreneurs reported acquiring funds to start or grow the business
as one of the key challenges, followed by networks and connections).
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    A long-standing issue in the area of broker regulation concerns the
regulatory status of these persons who play a discrete role in bridging
the gap between small businesses and investors. Concerns have been
raised that ``identifying potential investors is one of the most
difficult challenges for small businesses trying to raise capital . . .
[yet] companies that want to play by the rules struggle to know in what
circumstances they can engage a `finder' or a platform that is not
registered as a broker-dealer.'' \15\ Observers have described a ``gray
market,'' reflecting a ``major disconnect'' between the various laws
and regulations applicable to securities brokerage activities, and the
methods and practices by which capital is raised to fund early stage
businesses in the United States.\16\ As a result of this uncertainty,
individuals potentially could be engaging in unregistered brokerage
activity, or alternatively, not serving the market because of the
regulatory uncertainty associated with playing even a limited role in a
capital raise.\17\
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    \15\ Recommendation Regarding Finders, Private Placement
Brokers, and Investment Platforms Not Registered as Broker-Dealers,
ACSEC (May 15, 2017), available at https://www.sec.gov/info/smallbus/acsec/acsec-recommendation-051517-finders.pdf (``ACSEC
Recommendation 2017'').
    \16\ See ABA Task Force Report.
    \17\ See id. (``This vast and pervasive `gray market' of
brokerage activity creates continuing problems for the unlicensed
brokers, the businesses which rely upon them for funding, attorneys
and other professionals advising both the brokers and businesses,
and, last but not least, the federal and state regulators who are
charged with the obligation to enforce laws and regulations that are
out of step with current business practices.'').
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    Over the years, there have been many calls for Commission action in
this area. In 2005, the ABA Task Force recommended that the Commission
work with the Financial Industry Regulatory Authority (``FINRA,'' which
was then the National Association of Securities Dealers) and state
regulators to establish a simplified system that would allow persons to
solicit investors for small issuers, subject to a reduced, but
appropriate, level of regulation.\18\ In

recent years, the U.S. Department of the Treasury recommended that the
SEC, FINRA, and the states propose a new regulatory structure for
finders and other intermediaries in capital-forming transactions; \19\
the former SEC Advisory Committee on Small and Emerging Companies (the
``ACSEC'') \20\ recommended that the Commission address questions
regarding whether and under what circumstances small issuers can engage
a finder or other intermediary that is not a registered broker-dealer,
highlighting the importance of finders for small business capital
formation; \21\ and the current SEC Small Business Capital Formation
Advisory Committee (the ``SBCFAC'') recommended that the Commission
adopt a clear framework for unregistered finders in light of their role
as intermediaries in fostering capital formation for smaller
businesses.\22\
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    \18\ See id. at 2 (stating that, among other things, the
proposed solution should modify the amount and scope of regulations
that apply such that they would be in proper balance with the scope
of activities to be pursued by those who will be subject to
regulations, and diminish the number of unlawful securities brokers
to a level that will make feasible effective enforcement actions
against continuing unlawful activity).
    \19\ See 2017 Treasury Report at 44.
    \20\ The ACSEC was formed in 2011 to provide the Commission with
advice on its rules, regulations and policies with regard to
protecting investors; maintaining fair, orderly and efficient
markets; and facilitating capital formation in relation to smaller
public companies. The ACSEC's term expired at the end of 2017 and it
was replaced by the SEC's new Small Business Capital Formation
Advisory Committee. See https://www.sec.gov/page/small-business-capital-formation-advisory-committee.
    \21\ See, e.g., ACSEC Recommendations Regarding the Regulation
of Finders and Other Intermediaries in Small Business Capital
Formation Transactions (Sept. 23, 2015), available at https://www.sec.gov/info/smallbus/acsec/acsec-recommendations-regulation-of-finders.pdf (requesting the Commission address the regulatory issues
surrounding finders and other private placement intermediaries as
referenced in the ABA Task Force Report and stating that a failure
to address the issue impedes capital formation for smaller
companies); ACSEC Recommendation 2017 (referencing the ABA Task
Force Report).
    \22\ See, SBCFAC Recommendations regarding the Capital Formation
Proposal (May 28, 2020), available at https://www.sec.gov/spotlight/sbcfac/capital-formation-proposal-recommendation-2020-05-08.pdf. See
also Transcript of SBCFAC at 59-61 for discussion of finders (May 6,
2019), available at https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-050619.pdf; Transcript of SBCFAC at 18, 112 for
discussion of finders (Feb. 4, 2020), available at https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-020420.pdf;
Transcript of SBCFAC at 112-117 for discussion of finders (May 8,
2020), available at https://www.sec.gov/info/smallbus/acsec/sbcfac-transcript-050820.pdf (encouraging the Commission to adopt a clear
framework for unregistered finders).
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    The status of these intermediaries has also been a concern for
participants in the SEC Government-Business Forum on Small Business
Capital Formation (``Small Business Forum''). The Small Business Forum
has repeatedly recommended that the Commission address the status of
finders, including recommendations that finders should be exempt from
the requirement to register as broker-dealers, and that the Commission
should define permissible activities in which finders can engage
without being deemed as engaging in activities that require broker
registration.\23\ In August 2019, the Small Business Forum's Small,
Emerging Businesses breakout group and the Mature and Later Stage
Private Companies breakout group both made recommendations related to
finders, indicating a broad market perception that additional clarity
and possibly relief may be needed in this area.\24\ Further, at the
Small Business Forum in June 2020, participants made a recommendation
related to finders.\25\
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    \23\ See, e.g., 37th Annual Government-Business Forum on Small
Business Capital Formation, Final Report (Dec. 12, 2018); 36th
Annual SEC Government-Business Forum on Small Business Capital
Formation, Final Report (Nov. 30, 2017); 35th Annual SEC Government-
Business Forum on Small Business Capital Formation, Final Report
(Nov. 17, 2016); 34th Annual SEC Government-Business Forum on Small
Business Capital Formation, Final Report (Nov. 19, 2015); 33rd
Annual SEC Government-Business Forum on Small Business Capital
Formation, Final Report (Nov. 20, 2014); 32nd Annual SEC Government-
Business Forum on Small Business Capital Formation, Final Report
(Nov. 21, 2013); 31st Annual SEC Government-Business Forum on Small
Business Capital Formation, Final Report (Nov. 15, 2012); 30th
Annual SEC Government-Business Forum on Small Business Capital
Formation, Final Report (Nov. 17, 2011); 29th Annual Small Business
Forum, Final Report (Nov. 18, 2010); 28th Annual SEC Government-
Business Forum on Small Business Capital Formation, Final Report
(Nov. 19, 2009); 27th Annual Small Business Forum, Final Report
(Nov. 20. 2008); 26th Annual SEC Government-Business Forum on Small
Business Capital Formation, Final Report (Sept. 24, 2007); 25th
Annual SEC Government-Business Forum on Small Business Capital
Formation, Final Report (2006); and 24th Annual SEC Government-
Business Forum on Small Business Capital Formation, Final Report
(Sept. 19, 2005). Copies of these and other Annual Government-
Business Forum on Small Business Capital Formation Final Reports
making recommendations relating to finders are available at https://www.sec.gov/info/smallbus/sbforumreps.htm.
    \24\ See Report on 38th Annual Government-Business Forum on
Small Business Capital Formation (Aug. 14, 2019), available at
https://www.sec.gov/files/small-business-forum-report-2019.pdf.
     The Mature and Later Stage Private Companies breakout group
also recommended that the M&A Broker Letter be codified. See M&A
Brokers, SEC Staff No-Action Letter (Jan. 31, 2014) (``M&A Broker
Letter''). In the M&A Broker Letter, the staff agreed not to
recommend enforcement action under Section 15(a) of the Exchange Act
for persons facilitating securities transactions in connection with
the transfer of ownership of a controlling interest in a privately-
held operating company under certain facts and circumstances. This
proposed exemptive order is limited to the regulatory status of
individuals who identify and solicit potential investors for an
issuer as discussed above, and does not address the M&A Broker
Letter or the associated recommendation to codify the staff position
in the M&A Broker Letter.
    \25\ See Report on 39th Annual Government-Business Forum on
Small Business Capital Formation (June 18, 2020), available at
https://www.sec.gov/files/2020-oasb-forum-report-final_0.pdf. The
Small Business Forum recommended that the Commission provide an
exemption from broker-dealer registration for finders facilitating
secondary transactions. Id. While the scope of this proposed
exemptive order is limited to finders participating in primary
offerings, the Commission is requesting comment on whether we should
expand the scope to include secondary offerings.
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    Against this background, and given the role of intermediaries with
respect to capital formation and investor protection, especially for
smaller issuers, the Commission believes it is important to address the
regulatory status of persons who engage in certain limited securities-
related activities on behalf of issuers. The Commission preliminarily
believes that this exemption would provide clarity to investors and
issuers, and establish clear lanes for both registered broker activity
and limited activity by finders that would be exempt from
registration.\26\
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    \26\ The conditions of this proposed exemptive order for Finders
differ from the requirements for solicitors under the Commission's
proposed amendments to Rule 206(4)-3 under the Investment Advisers
Act of 1940 (``Advisers Act''). See Investment Adviser
Advertisements; Compensation for Solicitations, Release No. IA-5407
(Nov. 4, 2019), [84 FR 67518 (Dec. 20, 2019)] (``Cash Solicitation
Rule Proposed Amendments'').
    These differences reflect the particular facts and circumstances
surrounding the proposed permitted activities for Finders and
solicitors, and the characteristics of the applicable regulatory
regimes, notably that a solicitor would solicit for an investment
adviser and would be subject to oversight by such investment
adviser, while a Finder would solicit for an issuer and therefore
would not be subject to such oversight. See Cash Solicitation Rule
Proposed Amendments at 67580.
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II. Broker Regulatory Framework

    Because of the broker's role as an intermediary between customers
and the securities markets, broker-dealers are required to register
with the Commission unless they can rely on an exception or
exemption.\27\ Registered broker-dealers are subject to comprehensive
regulation under the Exchange Act and under the rules of each self-
regulatory organization (``SRO'') of which the broker-dealer is a
member, including a number of obligations that attach when a broker-
dealer makes recommendations to a customer, as well as general and
specific requirements aimed at addressing certain conflicts of
interest.\28\
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    \27\ See, e.g., Registration Requirements for Foreign Broker-
Dealers, Exchange Act Release No. 27017 (Jul. 11, 1989), [54 FR
30013 (Jul. 18, 1989)] (``15a-6 Adopting Release'') at 30014-15.
    \28\ See, e.g., Regulation Best Interest, Exchange Act Release
No. 86031 (Jun. 5, 2019), [84 FR 33318 (Jul. 12, 2019)]
(``Regulation Best Interest Adopting Release'').

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    Section 3(a)(4) of the Exchange Act generally defines a ``broker''
as ``any person engaged in the business of effecting transactions in
securities for the account of others.'' \29\ Section 15(a)(1) of the
Exchange Act, in turn, generally makes it unlawful for any broker to
use the mails or any other means of interstate commerce to ``effect any
transactions in, or to induce or attempt to induce the purchase or sale
of, any security'' unless that broker is registered with the Commission
in accordance with Section 15(b) of the Exchange Act.\30\ As a result,
absent an available exception or exemption,\31\ a person engaged in the
business of effecting transactions in securities for the account of
others is a broker required to register under Section 15(a) of the
Exchange Act.
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    \29\ Section 3(a)(4)(A) of the Exchange Act, 15 U.S.C.
78c(a)(4)(A).
    \30\ Section 15(a) of the Exchange Act, 15 U.S.C. 78o(a).
Although Section 15(a) applies to both brokers and dealers, this
proposed exemption would apply only to activities that historically
have been associated with brokers--that is, effecting securities
transactions for the account of others.
    \31\ See, e.g., Exemptions to Facilitate Intrastate and Regional
Securities Offerings, Release No. 33-10238 (Oct. 26, 2016) [81 FR
83494 (Nov. 21, 2016)] at 83510 (providing guidance on the exemption
from registration for broker-dealers whose business is exclusively
intrastate and who do not use any facility of a national securities
exchange).
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    The question of whether a person is a broker within the meaning of
Section 3(a)(4) turns on the facts and circumstances of the matter.
Because the Exchange Act does not define what it means to be ``engaged
in the business'' or ``effecting transactions,'' courts and the
Commission have looked to an array of factors in determining whether a
person is a broker within the meaning of the statute.\32\ Often, a key
consideration in these determinations is whether the person
participates on a regular basis in securities transactions at key
points in the chain of distribution.\33\ Over the years, the courts and
the Commission have identified certain activities as indicators of
broker status, including: (1) Actively soliciting or recruiting
investors; \34\ (2) participating in negotiations between the issuer
and the investor; \35\ (3) advising investors as to the merits of an
investment or opining on its merits; \36\ (4) handling customer funds
and securities; \37\ (5) having a history of selling securities of
other issuers; \38\ and (6) receiving commissions, transaction-based
compensation or payment other than a salary for selling the
investments.\39\ This is not an exhaustive list of the relevant
factors, and no one factor is dispositive.\40\
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    \32\ See, e.g., 15a-6 Adopting Release (noting that the
definition in the Exchange Act of the term ``broker'' and the
registration requirements under Section 15(a) of the Exchange Act
``were drawn broadly by Congress to encompass a wide range of
activities involving investors and the securities markets'').
    \33\ See SEC v. Bravata, 2009 WL 2245649 (E.D. Mich. 2009),
quoting SEC v. Martino. See also Mass. Fin. Servs., Inc. v. SIPC,
411 F. Supp. 411, 415 (D. Mass. 1976), aff'd, 545 F.2d 754 (1st Cir.
1976), cert. denied, 431 U.S. 904 (1977).
    \34\ See SEC v. Hansen, 1984 U.S. Dist. LEXIS 17835, at *26
(S.D.N.Y. April 6, 1984).
    \35\ Id.
    \36\ Id.
    \37\ See SEC v. M&A West, Inc., 2005 WL 1514101, at *9 (N.D.
Cal. June 20, 2005); SEC v. Margolin, 1992 WL 279735, at *5
(S.D.N.Y. 1992); SEC v. Benger, 697 F. Supp. 2d 932, 944 (N.D. Ill.
2010).
    \38\ See, e.g., SEC v. Hansen, 1984 U.S. Dist. LEXIS 17835, at
*26 (S.D.N.Y. April 6, 1984).
    \39\ Id.
    \40\ See SEC v. Benger, 697 F. Supp. 2d 932, 945.
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    A person who identifies and solicits potential investors for an
issuer or other party could be viewed as engaging in activity that
indicates broker status.\41\ The courts and the Commission generally
have viewed solicitation as any affirmative effort intended to induce a
securities transaction, including, but not limited to, telephone calls,
mailings, advertising (online or in print), and conducting investment
seminars.\42\ Solicitation includes efforts to induce a single
securities transaction as well as efforts to develop an ongoing
securities-business relationship.\43\ Although it is not required to
establish broker status and is not in itself determinative of broker
status, the receipt of transaction-based compensation in connection
with securities activities, such as solicitation of potential
investors, has been considered by courts as a factor indicating that
registration as a broker may be required.\44\
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    \41\ See, e.g., Definition of Terms in and Specific Exemptions
for Banks, Savings Associations, and Savings Banks Under Section
3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, Exchange
Act Rel. No. 44291, 66 FR 27760, 27772-73 at n.124 (May 18, 2001)
(``Solicitation is one of the most relevant factors in determining
whether a person is effecting transactions.''), cited in
Registration Process for Security-Based Swap Dealers and Major
Security-Based Swap Participants, Exchange Act Rel. No. 75611 (Aug.
5, 2015), 80 FR 48964, 48976 (Aug. 14, 2015) (``The Commission has
previously interpreted the term 'effecting transactions' in the
context of securities transactions to include a number of
activities, ranging from identifying potential purchasers to
settlement and confirmation of a transaction.'').
    \42\ See, e.g., SEC v. Century Inv. Transfer Corp., et al., No.
71-cv-3384, 1971 WL 297, at *5 (S.D.N.Y. Oct. 5, 1971) (Century
``engaged in the brokerage business by soliciting customers through
ads in the Wall Street Journal, and engaging in sales activities
designed to bring about mergers between private corporations and
publically held shells controlled by'' a co-defendant); SEC v.
Hansen, 1984 U.S. Dist. LEXIS 17835, at *26 (S.D.N.Y. Apr. 6, 1984)
(defendant engaged in unregistered broker activity when he ``sold or
attempted to sell interest in the five [securities] by use of the
mails, the telephone, advertisements in publications distributed
nationally and by other intestate means of communication''); SEC v.
National Executive Planners, Ltd., et al., 503 F. Supp. 1066, 1072-
73 (M.D.N.C. 1980) (defendant engaged in unregistered broker
activity by using the mails and telephone to ``solicit[] clients
actively'' in the offer and sale of securities); SEC v. Earthly
Mineral Solutions, Inc., No. 2:07-cv-1057, 2011 WL 1103349, at *2
(D. Nev. Mar. 23, 2011) (defendant engaged in unregistered broker
activity when, among other things, he ``conducted general
solicitations through newspaper advertisements''); SEC v. Deyon, 977
F. Supp. 510, 518 (D. Maine 1997) (defendants engaged in
unregistered broker activity when they ``solicited investors by
phone and in person,'' ``distributed documents and . . . prepared
and distributed sales circulars'').
    \43\ See 15a-6 Adopting Release at 30018.
    \44\ See, e.g., SEC v. Helms, No. 13-cv-01036, 2015 WL 5010298,
at *17 (W.D. Tex. Aug. 21, 2015) (``In determining whether a person
'effected transactions [for purposes of the Exchange Act
registration requirements],' courts consider several factors, such
as whether the person: (1) Solicited investors to purchase
securities, (2) was involved in negotiations between the issuer and
the investor, and (3) received transaction-related compensation.'')
(citing cases initiated by the Commission).
---------------------------------------------------------------------------

    While some courts have discussed the issue of finders, their
interpretations have varied, and address the facts and circumstances of
the specific matter.\45\ The Commission has not previously recognized a
``finders'' exemption or exception, nor has the Commission broadly
addressed whether and under what circumstances a person may ``find'' or
solicit potential investors on behalf of an issuer without being
required to register as a broker, or even whether such activity
implicates the Commission's regulatory regime for brokers.\46\ Instead,
the Commission

understands that market participants have looked to staff no-action
letters discussing circumstances under which persons act as ``finders''
without registering as a broker-dealer.\47\
---------------------------------------------------------------------------

    \45\ See, e.g., SEC v. Collyard, 154 F. Supp. 3d 781, No. 11-CV-
3656 (JNE/JJK), 2015 WL 8483258 at *5 (D. Minn. Dec. 9, 2015)
(rejecting the argument that the defendant acted as a ``finder'' not
subject to registration under Section 15(a)); SEC v. Bio Defense
Corp., et al., No. 1:12-cv-11669-DPW (D. Mass. Sept. 6, 2019)
(concluding that the defendants acted as unregistered brokers in
violation of Section 15(a) because the directness of their
involvement in the securities sales was ``certainly broader than
that of a mere finder who has no broker/dealer experience and simply
brings parties together''); SEC v. Kramer, 778 F.Supp.2d 1320 (M.D.
Fla. 2011) (concluding that registration under Section 15(a) was not
required where the defendant acted like a ``finder'' and not a
broker where he introduced friends and family as prospective
investors to an issuer and received transaction-based compensation);
SEC v. Mapp, 2017 U.S. Dist. LEXIS 29267 (E.D. Tex. Mar. 2, 2017)
(finding that the defendant acted as a ``finder, as opposed to a
broker, as he was ``merely facilitating securities transactions
rather than performing the functions of a broker''). See also SEC v.
Offill, Civil Action No. 3:07-CV-1643-D (N.D. Tex. Jan. 26, 2012)
(``If an individual is a ``finder'' rather than a broker or dealer,
he is not required to register under the Exchange Act. `The
distinction drawn between the broker and the finder or middleman is
that the latter bring[s] the parties together with no involvement on
[his] part in negotiating the price or any of the other terms of the
transaction.' '').
    \46\ Exchange Act Rule 3a4-1 provides a conditional exemption
from broker status when ``associated persons'' of an issuer engage
in certain limited activities on behalf of the issuer. However, the
ability to rely on the rule is subject to a number of conditions,
including that the associated person does not receive compensation
that is based either directly or indirectly on transactions in
securities. The associated person must also perform, or be intended
primarily to perform at the end of the offering, substantial duties
for or on behalf of the issuer otherwise than in connection with
transactions in securities. Exchange Act Rule 3a4-1; see Persons
Deemed Not to Be Brokers, Exchange Act Release No. 22172, 1985 WL
634795 (June 27, 1985) (``Rule 3a4-1 Adopting Release''). Finders
are customarily paid transaction-based compensation and few finders
perform substantial duties for the issuer after the offering. Thus,
finders have generally not been eligible to rely on the Rule 3a4-1
exemption.
    \47\ Staff no-action letters, like all staff guidance, have no
legal force or effect: they do not alter or amend applicable law,
and they create no new or additional obligations for any person.
---------------------------------------------------------------------------

    In particular, in connection with private placements, the
Commission understands that market participants may look to the Paul
Anka staff no-action letter with respect to broker registration under
Section 15(a) of the Exchange Act.\48\ In the Paul Anka Letter, the
staff stated that it would not recommend enforcement action to the
Commission under Section 15(a) of the Exchange Act against an
individual who, without registering with the Commission as a broker-
dealer: (1) Entered into an agreement with an issuer to provide to the
issuer a list of names and telephone numbers of potential investors he
reasonably believed to be accredited investors and with whom he had a
pre-existing business or personal relationship, (2) had no further
contact with potential investors concerning the issuer, and (3)
received a finder's fee for doing so.\49\
---------------------------------------------------------------------------

    \48\ See Paul Anka, SEC Staff No-Action Letter (July 24, 1991)
(``Paul Anka Letter''). If the exemption is adopted, the Paul Anka
Letter and other staff positions relating to the application of
Section 15(a) of the Exchange Act in private offerings, including
but not limited to the letters discussed in footnotes 50 and 52
infra, may be moot, superseded, or otherwise inconsistent with the
exemption. As discussed below, the Commission is requesting comment
on which letters, if any, should or should not be withdrawn, and
why.
    \49\ Id. The facts of the Paul Anka Letter are very narrow. The
staff in its response noted that the individual would not: (i)
Solicit the prospective investors or have any contact with them
regarding the proposed investment; (ii) participate in any
advertisement, endorsement, or general solicitation; (iii)
participate in the preparation of any sales materials; (iv) perform
any independent analysis of the sale; (v) engage in any ``due
diligence'' activities; (vi) assist or provide financing for such
purchases; (vii) provide advice as to the valuation or financial
advisability of the investment; or (viii) handle any funds or
securities in connection with the investment.
    The staff's response also noted that the individual had not
previously engaged in any private or public offering of securities
(other than buying and selling securities for his own account
through a broker-dealer), had not acted as a broker or finder for
other private placements of securities, and did not intend to
participate in any distribution of securities after the completion
of the proposed private placement, so that the Paul Anka Letter only
addressed an individual's first participation in a securities
offering and not participation in any subsequent offerings by that
individual.
---------------------------------------------------------------------------

    As noted above, Commission staff has responded over the years to
other requests for staff statements in relation to broker status
issues, similar to those in the Paul Anka Letter. Differences in the
facts and circumstances can lead to different results. In some matters,
the staff provided the no-action statement that was requested.\50\ A
number of the no-action letters in this area, for example, involve
persons seeking to facilitate the sale of a business or a controlling
interest therein, a fact pattern different from that presented in the
Paul Anka Letter.\51\ But in certain other matters, the staff has
declined to provide such statements.\52\
---------------------------------------------------------------------------

    \50\ See, e.g., Garrett/Kushell/Assocs. SEC Staff No-Action
Letter (Aug. 8, 1980, Pub. Avail. Sept.7, 1980); May-Pac Management
Co. SEC Staff No-Action Letter (Oct. 23, 1973, Pub. Avail. Dec. 20,
1973); Victoria Bancroft SEC Staff No-Action Letter (July 9, 1987);
Russell R. Miller & Co., Inc. SEC Staff No-Action Letter (July 14,
1977); Corporate Forum, Inc. SEC Staff No-Action Letter (Dec. 10,
1972).
    \51\ M&A Broker Letter; Country Business, Inc. Staff No-Action
Letter (Nov. 8, 2006); International Business Exchange Corporation
Staff No-Action Letter (Dec. 12, 1986).
    \52\ See, e.g., Brumberg, Mackey & Wall, PLC Staff No-Action
Letter (May 17, 2010) (denial of no-action for a person who would
pre-screen investors for eligibility to purchase certain privately-
placed securities and pre-sell securities to those investors); John
Loofbourrow Associates, Inc. Staff No-Action Letter (June 29, 2006)
(denial of no-action for a person who would receive a commission for
introducing an investment banking client to a registered broker-
dealer).
---------------------------------------------------------------------------

III. Proposed Exemption for Finders

    The Commission acknowledges that so-called ``finders'' may play an
important role in facilitating capital formation, particularly for
smaller issuers. At the same time, the absence of a regulated
intermediary may raise investor protection concerns. The Commission
preliminarily believes that there are situations where the need to
impose the broker registration requirement may be mitigated by other
factors.\53\ Accordingly, the Commission is proposing to grant
exemptive relief pursuant to Sections 15(a)(2) \54\ and 36(a)(1) \55\
of the Exchange Act to permit a natural person to engage in certain
defined activities on behalf of an issuer (a ``Finder'') without
registration as a broker, subject to the conditions described
below.\56\ The proposed exemption would provide a non-exclusive safe
harbor from broker registration. The safe harbor is intended to provide
clarity with respect to the ability of a Finder to engage in certain
activities without being required to register as a broker under Section
15(a).\57\ Accordingly, no presumption shall arise that a person has
violated Section 15(a) of the Exchange Act if such person is not within
the terms of the proposed exemption; rather--consistent with how
questions under Section 15(a) have been evaluated--it would depend on
the facts and circumstances of the situation.
---------------------------------------------------------------------------

    \53\ See Rule 3a4-1 Adopting Release (``Exemptions from
registration have traditionally been narrowly drawn in order to
promote both investor protection and the integrity of the brokerage
community. At the same time, however, the Commission recognizes that
there are situations where imposition of the registration
requirement would be inappropriate.'').
    \54\ Section 15(a)(2) of the Exchange Act authorizes the
Commission to conditionally or unconditionally exempt from the
registration requirements of Section 15(a)(1) any broker or class of
brokers, by rule or order, as it deems consistent with the public
interest and the protection of investors.
    \55\ Section 36(a)(1) of the Exchange Act authorizes the
Commission, by rule, regulation, or order, to exempt, either
conditionally or unconditionally, any person, security, or
transaction, or any class or classes of persons, securities, or
transactions, from any provision or provisions of the Exchange Act
or any rule or regulation thereunder, to the extent that such
exemption is necessary or appropriate in the public interest, and is
consistent with the protection of investors.
    \56\ Nothing in the proposed exemption excuses compliance with
all other applicable laws, including the antifraud provisions of the
Securities Act and the Exchange Act and state law.
    \57\ As discussed above, whether a person is acting as a
``broker'' and in particular, whether he or she is ``engaged in the
business'' of effecting securities transactions for the account of
others will depend on the facts and circumstances of the particular
matter. Accordingly, engaging in some of the limited activities
falling within the terms of the proposed exemption should not be
considered per se to require registration as a broker-dealer in the
absence of the exemption.
---------------------------------------------------------------------------

    Specifically, the Commission is proposing to exempt two classes of
Finders, Tier I Finders and Tier II Finders, as described below, based
on the types of activities in which they are permitted to engage, and
with conditions tailored to the scope of their activities. The
Commission's proposed relief is intended to be narrowly-tailored and
seeks to address the capital formation needs of certain smaller issuers
while preserving appropriate investor protections.
    The proposed exemption for Tier I and Tier II Finders would be
available only where:
     The issuer is not required to file reports under Section
13 or Section 15(d) of the Exchange Act;
     The issuer is seeking to conduct the securities offering
in reliance on an

applicable exemption from registration under the Securities Act; \58\
---------------------------------------------------------------------------

    \58\ An issuer's failure to comply with the conditions of an
exemption from registration under the Securities Act for an offering
would not, in itself, affect the ability of a Finder to rely on the
proposed exemptive order provided the Finder can establish that he
or she did not know and, in the exercise of reasonable care, could
not have known, that the issuer had failed to comply with the
conditions of an exemption. However, a Finder that, through its
activities on behalf of an issuer, causes an issuer's offering to be
ineligible for an exemption from registration, would not be able to
rely on the proposed exemption.
     This proposed exemptive order is not intended to exempt an
issuer from its requirements under each offering exemption from
registration under the Securities Act.
---------------------------------------------------------------------------

     The Finder does not engage in general solicitation;
     The potential investor is an ``accredited investor'' as
defined in Rule 501 of Regulation D or the Finder has a reasonable
belief that the potential investor is an ``accredited investor'';
     The Finder provides services pursuant to a written
agreement \59\ with the issuer that includes a description of the
services provided and associated compensation;
---------------------------------------------------------------------------

    \59\ See footnote 68 and accompanying text.
---------------------------------------------------------------------------

     The Finder is not an associated person of a broker-dealer;
and
     The Finder is not subject to statutory disqualification,
as that term is defined in Section 3(a)(39) of the Exchange Act, at the
time of his or her participation.
    Limiting the proposed exemption to activities on behalf of issuers
that are not required to report under the Exchange Act and in
connection with offers and sales of securities made in reliance on an
applicable exemption from registration under the Securities Act is
intended to address concerns that have been raised over the years
regarding the perceived inability of smaller companies to engage the
services of a broker-dealer to assist with opportunities to raise
capital in exempt offerings.\60\ Smaller companies, particularly
smaller private companies, may be more likely to rely on the exemptions
from registration, given the initial and ongoing costs associated with
conducting a registered offering and becoming an Exchange Act reporting
company.\61\
---------------------------------------------------------------------------

    \60\ See, e.g., ACSEC Recommendation 2017 at 10 (stating that
``identifying potential investors is one of the most difficult
challenges for small businesses trying to raise capital'').
    \61\ See Harmonization Proposal at 17957.
---------------------------------------------------------------------------

    Although relatively smaller issuers that are required to report
under the Exchange Act may also encounter difficulty raising capital in
exempt offerings as compared to larger Exchange Act reporting issuers,
we have proposed limiting this relief to non-Exchange Act reporting
issuers because we believe these non-reporting issuers may be the types
of companies most likely to experience difficulty obtaining the
assistance of a broker-dealer, and are therefore most likely to need
the assistance of a Finder when seeking to raise capital in such
offerings.\62\
---------------------------------------------------------------------------

    \62\ See 2017 Treasury Report at 43-44.
---------------------------------------------------------------------------

    The proposed exemption would also require that a Finder not engage
in general solicitation of potential investors, and that the potential
investors be ``accredited investors'' or investors that the Finder has
a reasonable belief \63\ are ``accredited investors,'' as defined in
Rule 501 of Regulation D.\64\ These proposed requirements are intended
to provide investor protection by limiting the scope of potential
investors with whom Finders are permitted to engage on behalf of an
issuer.\65\ The accredited investor requirement is intended to ensure
that Finders solicit only potential investors who have a sufficient
level of financial sophistication to participate in investment
opportunities that do not have the additional protections provided by
registration under the Securities Act.\66\ Accredited investors
currently provide the vast majority of early-stage capital to small
businesses through exempt offerings,\67\ where they often invest
directly without the engagement of an intermediary. We believe the
targeted approach we are proposing would address the capital raising
needs of smaller issuers while maintaining appropriate investor
protections.
---------------------------------------------------------------------------

    \63\ The Commission recently reiterated that the steps necessary
to establish a reasonable belief as to investor status will depend
on the facts and circumstances of the contemplated offering and each
potential issuer. See Solicitations of Interest Prior to a
Registered Public Offering, Release No. 33-10699 (Sept. 25, 2019)
[84 FR 53011 (Oct. 4, 2019)] at 53018. Finders can look to the
methods that other market participants currently use to establish a
reasonable belief regarding an accredited investor's status in other
contexts.
    \64\ 17 CFR 230.501(a). The definition of accredited investor
provides that natural persons and entities that come within, or that
the issuer reasonably believes come within, any of the enumerated
categories at the time of the sale of the securities are accredited
investors.
    On August 26, 2020, the Commission adopted changes to the
accredited investor definition to add new categories of qualifying
natural persons and entities. Amending the ``Accredited Investor''
Definition, Release Nos. 33-10824; 34-89669 (Aug. 26, 2020)
(``Accredited Investor Adopting Release'').
    \65\ As the Commission previously indicated, ``[w]hether there
has been a general solicitation is a fact-specific determination.''
See Harmonization Proposal at footnote 70. One way, though not the
exclusive way, to demonstrate the absence of general solicitation is
by establishing the existence of a pre-existing substantive
relationship. Id. at 17966.
    The Commission has stated that it generally viewed a pre-
existing relationship as ``one that the issuer has formed with an
offeree prior to the commencement of the securities offering or,
alternatively, that was established through another person (for
example a registered broker-dealer or investment adviser) prior to
that person's participation in the offering.'' Id. The Commission
has stated that a substantive relationship is ``one in which the
issuer (or a person acting on its behalf, such as a registered
broker-dealer or investment adviser) has sufficient information to
evaluate, and does, in fact, evaluate, an offeree's financial
circumstances and sophistication, in determining his or her status
as an accredited or sophisticated investor.'' Id.
    \66\ Regulation D Revisions; Exemption for Certain Employee
Benefit Plans, Release No. 33-6683 (Jan. 16, 1987), [52 FR 3015
(Jan. 30, 1987)]. See also Accredited Investor Adopting Release.
     As the Commission recently stated in the Accredited Investor
Adopting Release, the accredited investor standard is similar to,
but distinct from, other regulatory standards in Commission rules
that are used to identify persons who are not in need of certain
investor protection features of the federal securities laws. See
Accredited Investor Adopting Release at footnote 8. Each of these
other regulatory standards serves a different regulatory purpose.
Accordingly, an accredited investor will not necessarily meet these
other standards, and these other regulatory standards are not
designed to capture the same investor characteristics as the
accredited investor standard. See id.
    The Commission, in adopting Rule 3a4-1, noted that ``the fact
that the Commission has concluded that, under limited circumstances,
investors do not need the protections afforded by registration under
the 1933 Act does not dictate a conclusion that a broad exemption
from broker-dealer is appropriate.'' The Commission is not
predicating the proposed exemption solely on the status of the
potential investor. Rather, as it did with Rule 3a4-1, the
Commission is considering, among other various approaches, whether
there are a set of conditions that considered together would be
appropriate in a narrow set of circumstances.
    \67\ From 2009 to 2019, Rule 506(b) offerings to only accredited
investors provided between 93-97% of total capital raised using Rule
506(b), the most commonly used offering exemption. See Accredited
Investor Adopting Release at 97.
---------------------------------------------------------------------------

    The requirement that a Finder enter into a written agreement \68\
with the issuer that includes a description of the services provided
and associated compensation is intended to explicitly define the role
of the Finder consistent with the terms of the proposed exemption and,
in turn, establish accountability between the parties.\69\
---------------------------------------------------------------------------

    \68\ The Finder could employ electronic media and communications
to satisfy the written agreement requirement.
    \69\ See footnote 26 and accompanying text.
---------------------------------------------------------------------------

    Next, a Finder cannot be an associated person of a broker-dealer as
defined under Section 3(a)(18) of the Exchange Act.\70\ The Commission
believes this

condition is appropriate because of the potential for investor
confusion and abusive sales tactics when the Finder is also associated
with a broker-dealer.\71\ Therefore, the relief provided by the
proposed exemption should not be necessary or available to such
persons. This condition is intended to ensure that regulated persons do
not attempt to circumvent applicable rules and regulations to which
they are already subject, including their required standard of conduct
when providing recommendations.\72\
---------------------------------------------------------------------------

    \70\ Section 3(a)(18) of the Exchange Act defines associated
person of a broker or dealer as: ``any partner, officer, director or
branch manager of such broker or dealer (or any person occupying a
similar status or performing similar functions), any person directly
or indirectly controlling, controlled by, or under common control
with such broker or dealer, or any employee of such broker or
dealer, except that any person associated with a broker or dealer
whose functions are solely clerical or ministerial shall not be
included in the meaning of such term for purposes of section 15(b)
of this title (other than paragraph 6 thereof).''
    \71\ See Rule 3a4-1 Adopting Release at *3.
    \72\ The Commission recognizes the importance of the protections
provided by the standard of conduct applicable to broker-dealers
when providing recommendations to retail investors. See Regulation
Best Interest Adopting Release at Section I.
---------------------------------------------------------------------------

    Finally, a Finder cannot rely on the exemption during a time he or
she is subject to statutory disqualification, as that term is defined
in Section 3(a)(39) of the Exchange Act.\73\ The Commission
preliminarily believes that any person subject to the provisions
described in Section 3(a)(39) should not be able to rely on this
exemption as we believe there is potential for abusive practices where
persons who are subject to a statutory disqualification participate in
securities transactions without the assurance of adequate supervision
or regulatory oversight.\74\
---------------------------------------------------------------------------

    \73\ Section 3(a)(39).
    \74\ See Rule 3a4-1 Adopting Release at *3 (``The Commission
believes that there is added potential for abusive practices in the
sale of an issuer's securities in circumstances where persons who
are subject to a statutory disqualification participate without
assurance of adequate supervision or regulatory oversight.'').
---------------------------------------------------------------------------

    Tier I Finders. For purposes of the proposed exemption, a ``Tier I
Finder'' is defined as a Finder who meets the above conditions \75\ and
whose activity is limited to providing contact information of potential
investors in connection with only one capital raising transaction by a
single issuer within a 12-month period,\76\ provided the Tier I Finder
does not have any contact with the potential investors about the
issuer. The contact information may include, among other things, name,
telephone number, email address, and social media information. The
Commission preliminarily believes limiting the exemption to this
activity will appropriately narrow the role of the Tier I Finder to
preclude the participation in continuous or multiple sales of
securities by persons that are not subject to broker-dealer
registration or to the heightened requirements of Tier II Finders. A
Tier I Finder that complies with all of the conditions of the exemption
may receive transaction-based compensation for the limited services
described above without being required to register as a broker under
Section 15(a) of the Exchange Act.\77\
---------------------------------------------------------------------------

    \75\ As discussed above, the proposed exemption would only be
available where: (i) The issuer is not required to file reports
under Section 13 or Section 15(d) of the Exchange Act; (ii) the
issuer conducts the offering in reliance on an applicable exemption
from registration under the Securities Act; (iii) the Finder does
not engage in general solicitation; (iv) the potential investor is
an accredited investor or the Finder has a reasonable belief that
the potential investor is an accredited investor; (v) the Finder
provides services pursuant to a written agreement with the issuer
that includes a description of the services provided and associated
compensation; (vi) the Finder is not an associated person of a
broker or dealer; and (vii) the Finder is not subject to statutory
disqualification.
    \76\ The Commission notes that requirement is similar to the
limitation included in Rule 3a4-1 for sales activities by associated
persons of an issuer. See Rule 3a4-1(a)(4)(ii)(C) (stating that as a
condition of the rule, subject to limited exceptions, the associated
person of an issuer cannot participate in selling and offering of
securities for any issuer more than once every 12 months).
    \77\ As noted above, no presumption shall arise that a person
has violated Section 15(a) of the Exchange Act if such person is not
within the terms of the proposed Tier I Finders exemption. Whether a
person is acting as a ``broker'' and, in particular, whether he or
she is ``engaged in the business'' of effecting securities
transactions for the account of others will depend on the facts and
circumstances of the particular matter. A person who falls within
the definition of broker must register with the Commission pursuant
to Section 15(a) of the Exchange Act, absent an applicable exemption
or exclusion. The proposed exemption is intended to provide a safe
harbor from the broker registration requirement to market
participants for the limited activities described herein.
---------------------------------------------------------------------------

    Tier II Finders. The Commission is also proposing an exemption that
would permit a Finder, where certain conditions are met, to engage in
additional solicitation-related activities beyond those permitted for
Tier I Finders. For purposes of the proposed exemption, a ``Tier II
Finder'' is defined as a Finder who meets the above conditions,\78\ and
who engages in solicitation-related activities on behalf of an issuer,
that are limited to: (i) Identifying, screening, and contacting
potential investors; \79\ (ii) distributing issuer offering materials
to investors; (iii) discussing issuer information included in any
offering materials,\80\ provided that the Tier II Finder does not
provide advice as to the valuation or advisability of the investment;
\81\ and (iv) arranging or participating in meetings with the issuer
and investor.\82\ As discussed above, the Commission generally views
solicitation as any affirmative effort to induce or attempt to induce a
securities transaction \83\ and broadly views these activities of Tier
II Finders to constitute solicitation. The identification of these
activities is not an exhaustive listing of activities that may
constitute solicitation. Rather, these are the limited solicitation-
related activities permissible under the proposed exemption.\84\ The
Commission preliminarily believes that limiting the proposed exemption
to these specified activities associated with solicitation, along with
the additional conditions discussed below, will appropriately narrow
the role of the Tier II Finder to support the proposed exemption.\85\
---------------------------------------------------------------------------

    \78\ See supra footnote 75 and accompanying text.
    \79\ See SEC v. Hansen, 1984 U.S. Dist. LEXIS 17835, at *26
(S.D.N.Y. April 6, 1984) (setting forth actively soliciting or
recruiting investors as commonly cited indicia of broker activity).
    \80\ See SEC v. Offill, 2012 WL 246061 (N.D. Tex. Jan. 26, 2012)
(stating that a ``finder'' will be performing the functions of a
broker-dealer, triggering registration requirements, if activities
include, among other things, discussion of details of securities
transactions).
    \81\ See infra p. 28 (discussing activities that Finders are not
permitted to engage in pursuant to the proposed exemption).
    \82\ A Tier II Finder is not subject to the Tier I Finder's
limitation of participation in only one capital raising transaction
by a single issuer in a 12-month period.
    \83\ See supra p. 13 (stating that solicitation includes efforts
to induce a single securities transaction as well as efforts to
develop an ongoing securities-business relationship).
    \84\ See supra footnote 77.
    \85\ As noted above, no presumption shall arise that a person
has violated Section 15(a) of the Exchange Act if such person is not
within the terms of the proposed Tier II Finders exemption. Whether
someone is acting as a ``broker'' and in particular, whether he or
she is ``engaged in the business'' of effecting securities
transactions for the account of others, will depend on the facts and
circumstances of the particular matter. A person who falls within
the definition of broker must register with the Commission pursuant
to Section 15(a) of the Exchange Act, absent an applicable exemption
or exclusion. The proposed exemption is intended to provide a safe
harbor from the broker registration requirement to market
participants for the limited activities described herein.
---------------------------------------------------------------------------

    A Tier II Finder wishing to rely on the proposed exemption would
need to satisfy certain disclosure requirements and other conditions:
\86\
---------------------------------------------------------------------------

    \86\ The disclosure requirements and conditions applicable to
Tier II Finders differ from the requirements applicable to
solicitors under the Cash Solicitation Rule Proposed Amendments. As
discussed above, the Commission preliminarily believes these more
specific disclosure requirements, including the required
acknowledgment, for Tier II Finders are appropriate to address the
differences in regulatory structures. See footnote 26 and
accompanying text.
---------------------------------------------------------------------------

    First, the Tier II Finder would need to provide a potential
investor, prior to or at the time of the solicitation, disclosures that
include:
    (1) the name of the Tier II Finder;
    (2) the name of the issuer;
    (3) the description of the relationship between the Tier II Finder
and the issuer, including any affiliation;
    (4) a statement that the Tier II Finder will be compensated for his
or her

solicitation activities by the issuer and a description of the terms of
such compensation arrangement;
    (5) any material conflicts of interest resulting from the
arrangement or relationship between the Tier II Finder and the issuer;
and
    (6) an affirmative statement that the Tier II Finder is acting as
an agent of the issuer, is not acting as an associated person of a
broker-dealer, and is not undertaking a role to act in the investor's
best interest.\87\
---------------------------------------------------------------------------

    \87\ A Tier I Finder or Tier II Finder that complies with the
requirements of the proposed exemption would not be subject to
broker-dealer sales practice rules, including Regulation Best
Interest.
---------------------------------------------------------------------------

    The Commission is proposing to allow a Tier II Finder to provide
such disclosure orally, provided that the oral disclosure is
supplemented by written disclosure and satisfies all of the disclosure
requirements listed above no later than the time of any related
investment in the issuer's securities.
    The Commission preliminarily believes that this disclosure would
direct an investor's attention to important information, such as the
fact that the Tier II Finder is paid by the issuer and any associated
material conflicts of interest, in order to facilitate the investor's
ability to evaluate the role of the Tier II Finder. In addition, the
Commission believes the disclosure should be made ``prior to or at the
time of the solicitation'' so that investors have this important
information early enough in the process to give the investor adequate
time to consider the information in order to make informed investment
decisions.\88\ While the Commission is requiring that the disclosures
be written, we believe this can be satisfied either through paper or
electronic means.\89\ For purposes of this proposed exemption, we
believe that delivery of the disclosure would be evidenced by the
acknowledgment required below.
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    \88\ See Regulation Best Interest Adopting Release at Section
II.C.1.
    \89\ The Finder could employ electronic media and communications
to satisfy the requirement.
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    The Tier II Finder must obtain from the investor, prior to or at
the time of any investment in the issuer's securities, a dated written
acknowledgment of receipt of the Tier II Finder's required disclosures.
While the Commission is requiring that the acknowledgment be written,
we believe this can be satisfied either through paper or electronic
means, similar to the disclosure condition discussed above.\90\ The
Commission believes this acknowledgment is important as it helps ensure
that the investor received the required disclosures.
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    \90\ Id.
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    Because Tier II Finders may participate in a wider range of
activity and have the potential to engage in more offerings with
issuers and investors, the Commission believes that heightened
requirements are appropriate. A Tier II Finder that complies with all
of the conditions of the proposed exemption may receive transaction-
based compensation for services provided in connection with the
activities described above without being required to register as a
broker under Section 15(a) of the Exchange Act.
    The Commission preliminarily believes that the proposed exemption
is narrowly drawn to permit a limited set of activities, subject to
conditions intended to address investor protection concerns, including
the requirement that any potential investors solicited under this
proposed exemption be accredited investors or investors the Finder has
a reasonable belief are accredited investors. In addition, Tier II
Finders, who will interact with potential investors, must provide those
investors with appropriate disclosures of the Tier II Finder's role and
compensation.\91\
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    \91\ See supra pp. 25-26 (describing required disclosures to the
investors) and infra 29 (describing the Commission's antifraud
protections). The Commission is seeking comment on questions related
to potential investor protection concerns associated with this
proposed exemption.
    Because Tier I Finders would only be providing the investor's
contact information to the issuer and would not have any contact
with potential investors about the securities offering, we
preliminarily do not believe that a similar disclosure requirement
for Tier I Finders is necessary or appropriate.
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    Because a Finder would engage in a limited scope of securities-
related activities with a limited set of investors, would be subject to
conditions commensurate with the level of activity, and would not
handle customer funds or securities or have the power to bind the
issuer or the investor, the Commission preliminarily believes that the
investor protection concerns that otherwise would be addressed by
registration as a broker and the related requirements in the limited
circumstances contemplated by the exemption should be addressed by the
conditions of the proposed exemption for each tier of Finders. In
particular, the disclosure requirement for Tier II Finders should help
to increase investor awareness of the scope of the Finder's
relationship with the issuer and potential conflicts of interest, and
as a result help to facilitate an informed investment decision.
    Consistent with the narrow scope of activities contemplated by the
proposed exemption, as noted above, a Finder could not be involved in
structuring the transaction or negotiating the terms of the
offering.\92\ A Finder also could not handle customer funds or
securities or bind the issuer or investor; participate in the
preparation of any sales materials; perform any independent analysis of
the sale; engage in any ``due diligence'' activities; assist or provide
financing for such purchases; or provide advice as to the valuation or
financial advisability of the investment.
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    \92\ To assist Finders in applying this standard, we propose to
use terms already familiar to market participants. To that end, for
the purposes of the proposed exemption, ``terms of the offering''
would be interpreted as the amount of securities offered, the nature
of the securities, the price of the securities and the closing date
of the offering period. This interpretation would be consistent with
the Instruction to Rule 204 of Regulation Crowdfunding. See Rule 204
of Regulation Crowdfunding.
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    The proposed exemption would apply only with respect to the defined
activities for each tier of Finder and is limited to activities solely
in connection with primary offerings. A Finder could not rely on this
proposed exemption to engage in broker activity beyond the scope of the
proposed exemption, such as to facilitate a registered offering, a
resale of securities, or the sale of securities to investors that are
not accredited investors or that the Finder does not have a reasonable
belief are accredited investors. The Commission preliminarily believes
these are important safeguards that operate as a constraint on the
conduct of Finders.
    If a Finder fails to comply with any of the relevant conditions
(for example, the Finder engages in general solicitation of potential
investors), the Finder could not rely on the proposed exemption. The
inability to rely on the proposed exemption means that the Finder may
need to consider whether it is required to register with the Commission
as a broker under Section 15(a) of the Exchange Act.\93\
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    \93\ As noted above, the proposed exemption would provide a non-
exclusive safe harbor from broker registration, and no presumption
shall arise that a person has violated Section 15(a) of the Exchange
Act if such person is not within the terms of the proposed exemption
but rather the need for registration would depend on the facts and
circumstances of the situation.
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    There are two important principles embodied in our regulatory
framework that are not affected by this exemption. Significantly, this
exemption would not affect a Finder's obligation to continue to comply
with all other applicable laws, including the antifraud provisions of
the Securities Act and the Exchange Act, such as the obligations under
Section 10(b) and Rule 10b-5 under the Exchange Act, and state law. In

addition, this exemption is not intended to affect the rights of the
Commission or any other party to enforce compliance with other
applicable law, or the available remedies for violations of the law.
Further, regardless of whether or not a Finder complies with this
exemption, it may need to consider whether it is acting as another
regulated entity, such as an investment adviser or a municipal advisor.
An exemption from the obligation to register as a broker-dealer does
not insulate a person from the registration requirements of the
Advisers Act if such person is acting as an investment adviser.
    Thus, the Commission preliminarily believes that the proposed
exemption would be consistent with the public interest and protection
of investors, and would also provide issuers with greater access to
investment capital and investors with access to investment
opportunities. Specifically, the proposed conditions for both Tier I
Finders and Tier II Finders should sufficiently restrict the scope of
the proposed exemption such that permitting limited activities
associated with solicitation in this narrow context would not implicate
the need for regulation of these activities under the broker regulatory
framework. At the same time, the proposed exemption would permit
Finders to play an important role in facilitating capital formation for
small businesses, consistent with many of the various recommendations
put forth through the years.\94\
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    \94\ See Section I.
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    Accordingly, for the reasons discussed above, the Commission
preliminary believes that the proposed conditional exemption would be
consistent with the public interest and the protection of investors and
would be necessary or appropriate in the public interest.

IV. Request for Comments

    The Commission is seeking comment on all aspects of the proposed
exemption. In particular, the Commission requests comment on the
following questions as well as the potential costs and benefits of the
proposed exemption. When responding to the request for comment, please
explain your reasoning.
    1. Have we accurately and completely identified the legal
uncertainties, if any, around the involvement by Finders in connecting
investors with small firms in need of capital?
    2. Have we appropriately defined Tier I Finders and Tier II
Finders? Should there be two tiers of Finders or instead should there
be multiple tiers of Finders? Should there be only one tier of Finders?
    3. Should the definition of Finder be limited to natural persons?
    4. Should the definition of Finder be limited to a natural person
resident in the U.S.? \95\
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    \95\ This term would be interpreted consistent with the meaning
in Rule 902(k)(1)(i) of Regulation S.
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    5. Have we appropriately identified the activities in which each
tier of Finder should and should not be able to engage? Does the
proposed exemption provide a workable path for Finders to be engaged in
this activity?
    6. Have we appropriately limited the types of investors whom a
Finder can ``find'' or solicit? Instead of limiting potential investors
to those the Finder reasonably believes are accredited investors,
should investors identified by Finders be subject to investment
limitations, regardless of the exemption being relied upon, such as a
dollar limit on the size of the investment? If so, please specify.
    7. Should the Finder be prohibited from engaging in general
solicitation as proposed? Would this create practical problems for a
Finder? For example, would a Finder be able to establish a pre-existing
substantive relationship with investors in order to not engage in
general solicitation? \96\
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    \96\ See Harmonization Proposal at footnote 70.
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    8. Should we limit the proposed exemption to offerings of a
specific size threshold? If so, how should we define such threshold?
    9. Have we appropriately limited the number of offerings a Tier I
Finder can participate in on an annual basis?
    10. Is the limitation that Tier I Finders do not have any contact
with potential investors about the issuer workable? Should we instead
permit Tier I Finders to have some contact with potential investors?
    11. Should we define ``capital raising transaction'' for purposes
of Tier 1? If so, how?
    12. Have we appropriately defined the conditions that should apply
to the proposed exemption for each tier of Finder? Is more clarity,
specificity or flexibility required with respect to the proposed
conditions? Are there other or different conditions that should apply
to the proposed exemption?
    13. Should Finders be able to ``find'' or solicit investors only
for exempt offerings, as proposed? Should Finders be able to ``find''
or solicit investors only for offerings under certain exemptions from
registration? If so, which ones?
    14. Should Finders be able to ``find'' or solicit for all non-
Exchange Act reporting companies or should they be able to solicit for
a narrower or wider range of companies?
    15. Should Finders only be able to ``find'' or solicit for primary
offerings? Should we expand the scope of the proposed exemption to
secondary offerings, such as transactions facilitating the sale of
equity by employees holding options or warrants?
    16. Should the proposed exemption include limitations on the types
of securities for which a Finder can ``find'' or solicit investors?
    17. Is more clarity or specificity required with respect to the
specific written disclosures that are a condition of the proposed
exemption for Tier II Finders? Should we provide more guidance about
any of the specific written disclosures?
    18. Are there any specific written disclosures to investors that
should be required, beyond those that are a condition of the proposed
exemption for Tier II Finders? Should the disclosures be required to be
written or should the Finder be permitted to provide them orally?
Should the written disclosures be required at all?
    19. Should we adopt comparable disclosure requirements with
disclosures required under the proposed changes to Rule 206(4)-3 under
the Advisers Act \97\ for solicitations of investors in private funds,
if adopted? Should the disclosures required by Tier II Finders be
deemed to satisfy the disclosure requirements under the proposed
changes to Rule 206(4)-3 under the Advisers Act \98\ for solicitations
of investors in private funds, if adopted?
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    \97\ See Cash Solicitation Rule Proposed Amendments. The Cash
Solicitation Proposed Amendments require that the solicitor
disclosure state: (A) The name of the investment adviser; (B) the
name of the solicitor; (C) a description of the investment adviser's
relationship with the solicitor; (D) the terms of any compensation
arrangement, including a description of the compensation provided or
to be provided to the solicitor; (E) any potential material
conflicts of interest on the part of the solicitor resulting from
the investment adviser's relationship with the solicitor and/or the
compensation arrangement; and (F) the amount of any additional cost
to the client or private fund investor as a result of solicitation.
    \98\ Id.
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    20. Should Tier II Finders be required to receive an acknowledgment
of receipt of the required disclosure from the investor? If so, are
there methods other than an acknowledgment, for example, a read receipt
for email, that could serve to validate that investors received the
required disclosure?
    21. Should Tier I Finders be subject to a disclosure and
acknowledgment requirement?

    22. Should Tier II Finders be required to enter into a written
agreement with the issuer where the issuer, without affecting the
Finder's obligations, also assumes liability with respect to investors
for the Finder's misstatements in the course of his or her engagement
by the issuer?
    23. Should the proposed exemption be conditioned on a Finder filing
a notice with the Commission of reliance on the exemption from
registration? Why or why not? If so, when should Finders be required to
file the notice? What, if any, disclosures should be required in the
notice?
    24. Should there be any limitations on the amount of fee a Finder
can receive?
    25. Should we impose limitations on the form of compensation
Finders can receive? Should Finders be prohibited in certain
circumstances from receiving transaction-based compensation, and
instead be required to receive compensation that is not tied to the
success of the transaction (that is a fixed fee or other arrangement)?
If so, under what circumstances and how should Finders then be
compensated?
    26. Should a Finder be able to receive a financial interest in an
issuer as compensation for its services? Why or why not?
    27. Are the explicit limitations on the activities in which Finders
can or cannot engage appropriate for each tier of Finder? What other
activities should be expressly permitted or prohibited for each class
of Finder?
    28. Should we provide guidance on how a Finder can establish that
he or she did not know and, in the exercise of reasonable care, could
not have known, that the issuer had failed to comply with the
conditions of an exemption?
    29. Should we provide further guidance on the solicitation-related
activities in which Tier II Finders can engage on behalf of an issuer,
for example, guidance surrounding a Tier II Finder's discussion of
issuer information and arrangement and participation in meetings with
issuers and investors?
    30. Should we provide guidance regarding activities of private fund
advisers, M&A Brokers as defined in the M&A Broker Letter,\99\ or real
estate brokers that may require registration under Section 15(a) of the
Exchange Act? Should we consider codifying the M&A Broker Letter? \100\
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    \99\ An M&A Broker is defined as a person engaged in the
business of effecting securities transactions solely in connection
with the transfer of ownership and control of a privately-held
company through the purchase, sale, exchange, issuance, repurchase,
or redemption of, or a business combination involving, securities or
assets of the company, to a buyer that will actively operate the
company or the business conducted with the assets of the company.
See M&A Broker Letter.
    \100\ See supra footnote 24 and accompanying text.
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    31. Are there other areas in which the Commission should provide
guidance regarding the registration requirements of Section 15(a) of
the Exchange Act to other types of limited-purpose broker-dealers?
    32. If the proposed exemption is adopted, which staff letters, if
any, should or should not be withdrawn, and why?
    33. Have we appropriately defined the disqualification condition
for Finders?
    34. Have we appropriately limited the proposed exemption to
individuals who are not associated persons of a broker-dealer?
    35. Should the proposed exemption include a limitation such that it
would not be available to individuals who were associated persons of a
broker-dealer within the previous 12 months?
    36. Should the proposed exemption be limited to individuals who are
not associated persons of a municipal advisor or investment adviser
representatives of an investment adviser?
    37. Should the proposed exemption be limited to individuals who are
not associated persons of an issuer? Why or why not?
    38. Would the proposed exemption provide sufficient investor
protections while promoting capital formation for small businesses?
    39. Would the proposed exemption have a competitive impact on
registered brokers?
    40. With respect to the activities permitted for Tier I Finders,
what are the practical implications of the requirements if they were
subject to broker registration? What about for Tier II Finders?
    41. Should we instead take an alternative approach for either class
of Finders?
    42. Are there areas related to the proposed Finders framework for
which the Commission should provide guidance?
    43. Should we coordinate with other regulators to provide clarity
and consistency on what types of activities Finders and other limited
purpose brokers may engage in?
    44. Are there any other sources of data or information that could
assist the Commission in analyzing the consequences of the proposed
exemption? We request that commenters provide any relevant data or
information.
    45. Other than the possible obligation of a Finder to register as a
broker-dealer, the proposed exemption is not intended to affect the
rights of the Commission or any other party to enforce compliance with
applicable law, or the available remedies for violations of the law.
This includes, in the case of the Commission, the ability to impose a
broker-dealer registration bar on a person for misconduct that would
warrant a bar. Are there any other considerations in this regard that
the Commission should take into account as it considers the exemptive
relief?

    By the Commission.

    Dated: October 7, 2020.
Vanessa A. Countryman,
Secretary.
[FR Doc. 2020-22565 Filed 10-9-20; 8:45 am]
BILLING CODE 8011-01-P