SEC Advisory Committee Calls for Bringing 'Finders' in From the Shadows

NEW YORK (The Deal) -- An influential advisory committee to the Securities and Exchange Commission believes it's high time the regulator bring private placement "finders" out of the shadows.

The commission's Advisory Committee on Small and Emerging Companies had a spirited discussion about finders June 3 in a public session in Washington, but ran out of time before it could fashion a recommendation. Instead, the committee decided to explore the subject further in the coming weeks. Committee Chairman Stephen Graham, a partner in the Seattle office of law firm Fenwick & West LLP, said the committee would take up finders in a telephone conference and likely fashion a formal recommendation for the SEC to consider at its next quarterly meeting in September.

Although the SEC has never officially defined what a "finder" is, they have nevertheless become fixtures in the world of small-cap and early-stage capital raising. Finders are intermediaries who are not registered with the SEC or the Financial Industry Regulatory Authority and they aren't formal employees of registered broker-dealers. They are often used as middlemen by companies too small or too under-capitalized to put an investment bank on retainer for a private placement, and they are paid for bringing investors into deals.

The SEC has gone to a great deal of time and expense to carefully define what a broker-dealer is via extensive regulations. No one is allowed to engage in selling stock without a license, and they must be registered. Finra rides herd on the broker-dealer industry as its self-regulatory organization. But finders aren't regulated, having long functioned in a gray area, bringing investors into placements that investment banks find too small or too much trouble. The finders keep a low profile and provide a variety of services, including sometimes creating financial structures for deals and advising companies.

"They can help companies. They have knowledge of the niche, though they are not broker-dealers," Graham said. "But there are also people in this area who are not ethical and can cause problems for issuers and investors."

An exception is made by the SEC for a person who introduces an investor to an issuer and accepts a finder's fee regardless of whether a stock sale takes place. But anyone who does this more than once is considered to likely be "engaged in the business of selling securities for compensation," which requires either a license or registration, or both.

"Sometimes I will run into a finder who says they aren't registered because they have only 'sold stock once,' and they have only done that three times," said John Borer III, senior managing director with Benchmark Co. LLC and a member of the advisory committee.

Part of the problem with finding an answer to the finder issue is that finders have no organization lobbying the SEC orCongresson their behalf.

"The trouble with lobbying is that, at some point, the lobbyist has to say who paid them, and finders are in the shadows because they aren't registered," said Peter LaVigne, a partner with Goodwin Procter in New York.

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