July 23, 2025

Capital Formation: The SEC Chairman and Commissioners Weigh in on Finders

The question of what to do about “finders” has haunted securities regulators and practitioners for many years, much to the frustration of everyone who has sought to find a solution. For this purpose, “finders” refers to those persons who assist companies with capital-raising activities in private markets without being registered as a broker-dealer. When I was the Chair of the American Bar Association Business Law Section’s Federal Regulation of Securities Committee, I had the good fortune to work with an extraordinarily talented and dedicated Subcommittee that was entirely focused on this one topic, and over the years they have volunteered considerable amounts of time toward addressing this issue and proposing practical solutions. We then saw a glimpse of a path forward five years ago when the SEC took initial action on the issue, but as of today the Commission has not move forward with any regulatory solution.

At the SEC’s Small Business Capital Formation Advisory Committee meeting that took place yesterday at the SEC, the topic of finders was addressed, and the Chairman and Commissioners weighed in with their opening remarks. In his opening statement, Chairman Atkins noted:

We know small businesses seeking to raise less than $5 million in capital can struggle to attract funding from VC firms and institutions. Larger investors are often inclined to step in at later stages of growth, leaving fledgling businesses and their founders with limited avenues to capital. So, after exhausting their own network of family members and friends, businesses in the earliest stage of growth sometimes engage a finder to identify angel investors who target smaller, higher-risk investment opportunities. These finders may provide valuable introductions and facilitate access to much-needed capital. But the regulatory approach to this limited activity, when done outside of a registered broker-dealer, is quite opaque.

Commission staff have issued no-action letters over the years addressing very narrow circumstances under which persons have sought to act as finders without registering as a broker-dealer. Gray areas remain. And a lack of regulatory certainty can deter conscientious participants from helping small businesses to secure financing at a formative stage.

So understandably, many have called on the Commission to provide greater clarity over the years. In 2017, the Treasury Department recommended that the SEC work with the Financial Industry Regulatory Authority (FINRA) and the states to formulate a new regulatory structure. The SEC proposed an exemptive order with a request for comment in October 2020 but has since taken no further action. And the legal gray area that lingers can deprive small businesses of essential resources at a time when thirty-three percent of them launch with less than $5,000 in funding—and nearly forty percent fail due to lack of capital.

Commissioner Peirce raised some questions for consideration in her comments:

Though the 2020 Proposal was never adopted, as you consider the staff’s overview of the 2020 Proposal and discuss issues surrounding finders more generally, please consider the following questions:

1. Is the 2020 Proposal a good starting point for exemptive relief, or would a different approach be more effective? Have market practices changed since 2020 in a way that would warrant changes to the 2020 Proposal?
2. Would the 2020 Proposal, or any action related to providing clarity for finders, benefit from a full rulemaking process, as some commenters suggested in 2020?
3. Is the Committee still supportive of a blanket exemption for finders for offerings under a certain size?
4. Should any exemption for finders cover activities related to secondary offerings?
5. In 2020 commenters were divided on whether an exemption should be provided only to natural persons. Does this committee favor one approach over the other?

Commissioner Uyeda noted in his remarks:

Let’s be clear: any activity, whether in the form of an exemption or a dramatically scaled down regulatory structure, remains subject to the antifraud provisions of the securities laws. But a person who merely provides a name and contact information to a company seeking capital in exchange for modest transaction-based compensation does not need to be regulated in the same manner as the largest Wall Street brokerage firms. Finders should be subject to an appropriately tailored set of guardrails that reflect their limited involvement in smaller scale private capital market activities. The 2020 Proposal included a number of exemptive conditions; perhaps there are others that should be considered.

The objective is to minimize burdens on legitimate intermediaries while decreasing the likelihood that illegitimate actors will engage in bad acts. As then-Commissioner Stephen J. Friedman observed forty-five years ago, “all regulation-deregulation decisions involve a trade-off between the abuse-prevention of a prophylactic rule and that rule’s interference with the activities of non-abusers.” In this instance, any framework should open doors to finders who serve as legitimate conduits for investment information flows without imposing disproportionately draconian broker-dealer regulatory standards. I look forward to reviewing the Committee’s recommendations.

Finally, Commissioner Crenshaw offered a different perspective on the Commission’s 2020 proposed exemptive order, stating:

First, we checked important investor protections at the door. The 2020 proposal did not attempt to marry the finder registration exemption with effective guardrails. If the Commission is to engage in policymaking that relaxes registration requirements on finders, then it must consider more than just the potential for issuer access to capital; due consideration must be given to the investor experience.

The 2020 proposal would have allowed finders to: contact potential investors; distribute offering materials; pitch those materials in meetings with issuers and investors; and effectively praise the benefits of that issuer (without expressly “advising” on the investment) – all in exchange for compensation premised on whether they make the sale. This is traditional broker activity.

If the Commission allows finders to engage in traditional broker activity without registration – or even with diminished regulatory responsibilities – we must build in guardrails. The 2020 proposal eschewed broker requirements under Regulation Best Interest (even though the Commission had just made clear in 2019 that Regulation Best Interest applies to accredited investors); it also sidelined books and records, basic sales practice, and examination requirements, among other things. The proposal did not even require finders to notify the Commission of their intent to utilize the exemption. Finders were essentially carved out of our registration regime without any mechanism for us to review whether they were complying with the requirements of the safe harbor, or to evaluate the success of the program.

The need for guardrails is important as the Commission considers expanding access to the opaque private markets, whose securities are less liquid, bear higher transaction costs, and whose valuation practices are less consistent (to name a few potential issues).

But, perhaps more importantly, the need for protections is even greater in this finders’ space which – again and again – has proven itself susceptible to microcap fraud, pump-and-dumps, front-end-fee scams, and other manipulative activity. Indeed, experts have noted that the enforcement actions and litigations exposing finder-related fraud likely represent only “the tip of the iceberg.”

We will be watching to see what recommendation the Small Business Capital Formation Advisory Committee comes up with on the topic of finders and whether the Commission elects to go forward with any efforts to address the regulatory grey areas in this realm.

– Dave Lynn

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