On July 22, 2025, at 10 am Eastern Time, the Securities and Exchange Commission’s (“SEC”) Small Business Capital Formation Advisory Committee will hold an interactive conference regarding the proposed finder rule from five years ago. If adopted, the rule would create an exemption permitting certain capital raisers to receive transaction-based compensation for capital raising activities without registering as a broker-dealer under federal securities laws.
Background
When raising capital, many issuers seek to retain capital raisers or “finders” to identify potential investors and place securities. However, to legally do this and pay finders a commission based on the capital raised, the finder would need to be a registered broker-dealer of securities. A “broker-dealer” is defined as a person or firm in the business of buying and selling securities for their own account or on behalf of others. Activities generally considered to be broker-dealer activities under SEC guidance and judicial precedent include identifying and soliciting potential investors, assisting issuers in structuring securities transactions, advising potential investors regarding investments, negotiating between issuers and potential investors, and determining the creditworthiness of potential investors. Often, receiving “transaction-based compensation,” where compensation is based on the capital raised, is the biggest indicator of whether someone was acting as a broker-dealer. Becoming a registered broker-dealer is a complex process requiring the finder to meet certain Financial Industry Regulatory Authority (“FINRA“) and SEC registration standards.
Back in 2020, the SEC issued a notice proposing to grant exemptive relief to permit natural persons to engage in certain activities on behalf of issuers without being a registered broker-dealer of securities (the “Notice”). The Notice acknowledged that identifying potential investors can be difficult for smaller offerings and that many registered broker-dealers are unwilling to work with smaller issuers. The Notice further acknowledged that many view there to be a disconnect between the various laws and regulations applicable to capital raisers and the methods used by early-stage businesses to raise capital. In connection with these issues, the SEC proposed a safe harbor to allow some individuals to raise capital without being a licensed broker-dealer.
The Proposed Rule
The Notice proposed to exempt two classes of finders, which they designated as “Tier I Finders” and “Tier II Finders” based on the types of activities in which they are permitted to engage, and with conditions tailored to the scope of their activities. Tier 1 Finders represent finders whose activity is limited to providing contact information of potential investors in connection with only one offering by a single issuer within a one-year period, provided that the finder does not have any contact with the potential investors. Tier II Finders represent finders who engage in solicitation-related activities on behalf of an issuer that are limited to identifying and contacting potential investors, distributing offering materials, discussing issuer information (without providing advice), and arranging meetings between the issuer and investor. At the time of solicitation, Tier II finders would need to provide written disclosure detailing the finder’s relationship with the issuer, their compensation, and any conflicts of interest. For both tiers of finders, the proposed exemption would only be available for private companies relying on a securities exemption, where the finder is not generally soliciting, the potential investor is an accredited investor, the finder provides services pursuant to a written agreement, the finder is not associated with a broker-dealer, and the finder is not subject to statutory disqualification.
Practical Implications
If adopted and provided all conditions are satisfied, the proposed rule would create a limited safe harbor allowing issuers to compensate qualifying finders for specified activities related to identifying accredited investors, subject to the tier-specific restrictions and disclosure requirements. The rule would create a clear pathway for finders to connect potential investors with issuers and receive compensation without needing to register and a broker dealer.
As of July 2025, the SEC has not adopted the proposed finder exemption rule, and the existing broker-dealer registration requirements remain in full effect. However, next week, the SEC will hold an interactive conference regarding the proposed rule. Tune in to hear staff from the SEC’s Division of Trading Markets provide an overview of the SEC’s 2020 release and exploration of potential principles, frameworks, conditions, and safeguards that could permit certain finders to engage in limited capital raising activities.