October 8, 2020

SEC Proposes Conditional Exemption for “Finders” Involved in Capital Raising

More than three years after the SEC’s Advisory Committee on Small and Emerging Companies issued a recommendation, the SEC voted 3-2 to propose a conditional exemption from the broker registration requirements of Section 15(a) of the Exchange Act for “finders.” The proposed exemption would permit “finders” to engage in certain capital raising activities involving accredited investors and is intended to provide clarity to smaller businesses and their investors, and “finders” who assist them in raising capital. Under the proposed exemption, “finders” would be classified in two tiers with conditions tailored to the scope of their respective activities. Here’s the proposing release. This excerpt from the SEC’s press release summarizes the two classes of finders – see the complete press release for a summary of the applicable conditions:

Tier I Finders

A Tier I Finder would be limited to providing contact information of potential investors in connection with only a single capital raising transaction by a single issuer in a 12 month period. A Tier I Finder could not have any contact with a potential investor about the issuer.

Tier II Finders

A Tier II Finder could solicit investors on behalf of an issuer, but the solicitation-related activities would be limited to: (i) identifying, screening, and contacting potential investors; (ii) distributing issuer offering materials to investors; (iii) discussing issuer information included in any offering materials, provided that the Tier II Finder does not provide advice as to the valuation or advisability of the investment; and (iv) arranging or participating in meetings with the issuer and investor.

For additional information, the Office of the Advocate for Small Business Capital Formation posted a video and a chart showing a comparison of some of the permissible activities, requirements and limitations for Tier I Finders, Tier II Finders, and registered brokers. The proposal is subject to a 30-day comment period.

Over the years, many small companies needing capital have found it difficult to determine when it’s appropriate to engage “finders.” In her statement in support of the proposal, Commissioner Hester M. Peirce found a way to acknowledge Eddie Van Halen’s “ebullient guitar-playing” by thanking Chairman Jay Clayton, the Division of Trading and Markets and others “for recognizing that the make-up-your-own-path approach works better for rock ‘n’ roll than it does for finders” – describing the current approach for finders as being ad-hoc and based on gut-feeling and guideposts gleaned from no-action letters and enforcement actions. Commissioner Peirce said the proposal provides a framework for finders and questioned whether the scope of the proposal should be expanded to secondary offerings.

Commissioners Allison Herren Lee and Caroline A. Crenshaw each issued dissenting statements criticizing the proposal for a lack of empirical support and investor protection concerns. In her statement, Commissioner Lee said she could have supported a rulemaking process that proposed a scaled registration format that required some form of record keeping and examination authority. Commissioner Lee continued by saying the proposal relies too much on the continued applicability of antifraud provisions as comfort for investor protections.

California Board Diversity Mandate Faces Legal Challenge

A couple of months ago, I blogged about California Assembly Bill (AB) 979 that would require public companies headquartered in California to include directors from “underrepresented communities” on their boards. California’s Governor Gavin Newsom signed it into law last week and it’s quickly been challenged in court. This Judicial Watch press release says that the group filed a lawsuit challenging the enforceability of AB 979. Cydney Posner’s blog provides a good overview of the lawsuit and notes that it’s patterned after the lawsuit challenging California’s board gender diversity law, SB 826:

Framed as a “taxpayer suit” much like Crest v. Padilla I, the litigation seeks to enjoin Alex Padilla, the California Secretary of State, from expending taxpayer funds and taxpayer-financed resources to enforce or implement the law, alleging that the law’s mandate is an unconstitutional quota and violates the California constitution.

The complaint requests entry of a judgment declaring any expenditures of taxpayer funds to implement or enforce AB 979 to be illegal and issuance of an injunction permanently prohibiting the Secretary from expending taxpayer funds to enforce or implement the provisions of the legislation. Presumably, California will file an answer contesting these claims; however, unless and until a court issues the requested injunction, the law will go into effect.

This Wilson Sonsini blog outlines the law and discusses potential reporting obligations. The blog suggests companies subject to the law start planning for compliance. For companies that don’t already have director diversity data, the blog says they may want to consider adding a question to their annual director and officer questionnaire to solicit the information. Not too long ago, I blogged about the quest for director diversity information and included one sample D&O question for consideration – and, this Dorsey blog includes another sample question.

Reg S-K “Modernization” Amendments Published in Federal Register Today!

Ever since the SEC adopted amendments to modernize Items 101, 103 and 105 of Regulation S-K in August, many have been watching – and waiting – for publication of the final amendments in the Federal Register. Thank you to John Newell of Goodwin Procter for posting this response in our Q&A Forum yesterday to questions about publication and the effective date of the amendments:

According to the Federal Register website, the amendments will be published on October 8, 2020. Thirty days results in an effective date of Saturday, November 7th.

That means that Form 10-Q reports and other filings submitted after 5:30 p.m. Eastern time on Friday, November 6th must comply with the amendments to Items 101, 103 and 105, to the extent applicable. Note that the EDGAR filing window for a same-day filing stamp closes at 5:30 p.m. Eastern time. The next filing day is Monday, November 9th, so filings made after the window closes but before 10 p.m. should comply with the amendments.

John followed up to say that already this morning, the rules have been posted. They provide for an effective date of Monday, November 9th, but that doesn’t change the fact that you’ll need to comply for anything filed after 5:30 p.m. Eastern Time on November 6th.

– Lynn Jokela