• NASAA Comment Letter
• Joint Letter from 30 State Securities Administrators

WASHINGTON, D.C. (November 13, 2020) — State securities regulators are urging the Securities and Exchange Commission (SEC) not to move forward with its proposal to order a new federal broker-dealer exemption for private placement finders amid concerns the proposal lacks adequate investor protections. “Finders” are individuals who are hired by private companies to locate potential investors.

In a comment letter to the SEC, the North American Securities Administrators Association (NASAA) said the agency’s proposal (Release No. 34-90112) threatens to harm investors by withdrawing oversight from individuals and situations known to be prone to abuse. NASAA’s comment letter is available here.

“NASAA opposes the proposal because it seeks to expand the private markets without providing any commensurate effort to protect investors from the enhanced risk of fraud in an unregulated environment,” said Lisa A. Hopkins, NASAA President and West Virginia’s Senior Deputy Securities Commissioner.

Hopkins said NASAA believes the limited controls proposed by the SEC would be inadequate because they cannot ensure that finders would solicit sophisticated investors only, they are too vague to enforce, they cannot be monitored for compliance, and they are susceptible to abusive practices that could harm small business capital formation.

Hopkins also said the proposal is not designed to achieve the Commission’s purported goals. For example, the SEC has justified the proposed exemption by referring repeatedly to the needs of small businesses and suggesting that it might facilitate fundraising in regions of the country that lack strong capital raising networks, or that it might enhance opportunities for minority- and women-owned businesses. “Even assuming that these rationales support exempting finders from registration, they should be viewed skeptically here because the proposal is not designed to achieve them,” Hopkins wrote.

For example, the proposal does not limit the size, location, or nature of the issuers that can work with finders, nor does it limit the amount of compensation that finders can receive. “As proposed, the only factor that would motivate finders to pursue one opportunity over another would be the compensation offered by the issuer,” Hopkins wrote. “There is therefore no reason to believe that the proposal would help capital flow to underserved areas or particular issuers.”

In its comment letter, NASAA asks the SEC to engage with state securities regulators, self-regulatory organizations, and other stakeholders to determine an appropriate regulatory framework that would provide finders with clarity while establishing necessary investor safeguards.

Separately, 30 state securities regulators have signed a letter to the SEC raising concerns about the proposed exemption. “This proposal runs directly counter to the public interest and, if ordered, will actually harm rather than protect investors,” the letter said. “Given both perennial concerns about and recent incidents of extraordinarily harmful frauds perpetuated by persons acting as finders, the last thing state securities regulators expected to see was a Commission proposal that facilitates unlicensed intermediaries in the private market.” The joint letter is available here.