The SEC is once again revisiting the long-debated “finder” exemption. This rule could allow certain individuals to connect small businesses with investors without triggering full broker-dealer registration. The issue has remained unresolved since 2020 and continues to be a critical gray area for capital formation at the earliest stages. The July 22 Small Business Capital Formation Advisory Committee meeting has brought the matter back into focus.
The Discussion Centers on a Fundamental Challenge
How to open the door to capital for startups and small businesses while maintaining investor protections? Industry groups are lining up on both sides. Some view it as a needed clarification. Others view it as a risky step toward reduced oversight.
If you have ever raised early-stage capital, advised a founder, or built investor networks from scratch, you understand the stakes. There is a real opportunity to simplify a broken process. At the same time, there is a delicate balance between access and exposure. This is one of those moments when the capital markets community needs to speak with clarity.
In my view, instead of permitting unregistered individuals or companies to act as brokers or broker-dealers, the focus should be on clarifying the existing regulations and rules in this area. A better-defined understanding of the enforcement process and expectations would address the capital gap more effectively.
Consider the history of this sector, where questionable practices have often taken root.
Removing Regulations Does Not Provide a Solution
This area of capital is the most volatile and carries the highest risk of failure. In such an environment, the financial and regulatory exposure for a registered firm or individual is substantial and typically avoided by most broker-dealers.
The reason for the lack of capital in early-stage and startup ecosystems lies in the hesitation of registered participants to operate within it. Fear of regulatory consequences has created a void.
We should encourage capital formation for new technologies and companies through thoughtful regulations, clear enforcement standards, and support from both regulators and society. Once that foundation is in place, capital will flow more freely.
Source:
https://www.jdsupra.com/legalnews/sec-revisits-finder-exemption-potential-3422539/
By Damon D. Testaverde
Chairman of Network 1 Financial Securities, Inc.
