NSBA Seeks Reg Relief for Finders and Business Brokers

August 7, 2013

pic-moneyAs a follow up on an NSBA meeting with Securities and Exchange Commission (SEC) staff, NSBA has submitted a letter to the SEC seeking a safe harbor from the broker dealer registration requirements for small finders and business brokers.  To read the NSBA letter, click here.

Business brokers have a substantial positive economic impact by making the market for closely held small businesses more efficient, by helping entrepreneurs achieve full value for their business when it is sold and by helping aspiring business owners find business opportunities that are appropriate given their skills and financial resources.

Finders play an important role in introducing entrepreneurs to potential investors and raising the capital necessary to launch or grow their businesses.  They can reduce the cost of raising capital and increase the likelihood of raising needed capital, particularly for entrepreneurs who have a limited number of pre-existing relationships with accredited investors.

The current regulatory ambiguity surrounding finders and business brokers impedes small firms’ ability to raise capital and has an adverse impact on economic growth and job creation.

NSBA supports a regulatory exemption for business brokers to the broker-dealer registration requirements consistent with the principles of the Country Business no action letter dated November 8, 2006 but extended to include the sale of a controlling interest in the business rather than being limited to the sale of the entire business.

NSBA also supports an exemption for finders from the broker-dealer registration requirement provided that the finder is not “engaged in the business of effecting transactions in securities for the account of others.”

The safe harbor is meant to ensure finders who assist small businesses to find capital from time to time either as an ancillary activity to some other business (e.g. the practice of law, public accounting, insurance brokerage, etc.) or as main street business colleagues or as friends or family members of the business owner are not treated the same for regulatory purposes as a Wall Street broker-dealer.

NSBA proposes a safe harbor such that a finder is deemed not to be engaged in the business of effecting transactions in securities for the account of others” if the finder meets one or more of the following criteria:

  1. the finder does not receive finder’s fees exceeding $250,000 in any year;
  2. the finder does not assist an issuer in raising more than $5 million in any year;
  3. the finder does not assist any combination of issuers in raising more than $10 million in any year; or
  4. the finder does not assist any combination of issuers with respect to more than 10 transactions in any year.

NSBA would also support prohibiting finders from engaging in certain activities to be eligible for this exemption on the grounds that such activities would constitute crossing the line to effecting transactions in securities or providing investment advice (thus triggered investment advisory registration requirements).  Among those activities that would be proscribed would be:

  1. holding investor funds or securities;
  2. providing investment advice or recommending the purchase of securities; and
  3. participating materially in negotiations between the issuer and investors.