Private Placement Brokers and Finders, Oh My

In October of 2016, the SEC approved FINRA rules allowing for the registration of limited purpose broker-dealers, called capital acquisition brokers or CABs (see my blog post on November 1, 2016). This set of rules came about from a No-Action letter issued the year before that granted a no-action position for a very limited exemption from registration for business finders. (See the No-Action letter here).

Now there is a bill moving through Congress ( Unlocking Capital for Small Businesses Act of 2018—H.R. 6127) that moves to create a broader limited purpose broker-dealer.

Key points:

  1. Required disclosures
  2. Sale of a business
  3. Placement of securities exempt from registration
  4. Cannot be interest in an investment company
  5. May not hold funds or securities
  6. Cannot involve activity that requires registration as an investment adviser

The bill directs National Securities Associations (FINRA) to issue, rules that allow for this type of registration. It is interesting because the bill seems to be broader than the CAB rules in that there is no limitation on the type of investor (i.e accredited, institutional etc.). But it does limit the type of activity, in particular with respect to the offering of the interests of investment companies.

The bill also creates a safe harbor for “finders”. A finder is defined based upon the amount of compensation received and/or the number of transactions engaged in during a twelve month period. Important to this safe harbor is that a finder will be able to receive transaction based compensation.

The House has passed this bill and there is a parallel bill moving through the Senate.

My initial thoughts are that this bill simply complicates an already complicated issue. There are many firms that only have approval to do private placements. This bill does not allow a private placement broker to conduct a PIPE or raise capital for private funds, which most broker-dealers authorized to do private placements can do. What the bill does not address is what type of registration individuals will be required to have, or capital requirements. There is a reference to funding portals so perhaps these broker-dealers are more glorified funding portals than they are limited capital acquisition brokers. I just think the regulators are going to push back on the creation of these entities.

I am going to follow these bills and if passed the regulations that are drafted.

Let me know what you think.


(c) 2018 Sharon M. Davison

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