SEC logoIn its most recent meeting on September 23, 2015, the Securities and Exchange Commission’s Advisory Committee on Small and Emerging Companies recommended specific reforms that would significantly liberalize the rules governing private offering intermediaries and make it easier for companies to use them. If adopted, these reforms could greatly enhance the capacity of startups and early stage companies to reach investors and raise capital.


More than 95% of private offerings in America rely on the exemptions provided by Regulation D, particularly Rule 506. But fewer than 15% of Reg D offerings use a financial intermediary, such as a placement agent, broker-dealer or finder. This is largely due to the general requirement financial intermediariesthat anyone receiving a transaction based success fee in a securities transaction be registered with the SEC as a broker-dealer (and subject to regulatory oversight as such) and be a member of the Financial Industry Regulatory Authority or FINRA. This is so even if the intermediary’s participation in an offering is limited to giving the issuer the name of a prospective investor, and refrains from engaging in other services often provided by full service intermediaries, such as holding funds or securities, helping to negotiate the transaction, assisting in the preparation of offering materials or providing investment advice. The risks to both intermediaries and issuers of paying a success fee to a non-registered intermediary is fairly draconian. For intermediaries, the risk is forfeiture of the success fee, as issuers could use non-registration as a defense for non-payment. For issuers, the risk is rescission, i.e., that all investors in a round could have the right to demand their money back.

The Committee’s Recommendations

The Committee prefaced its recommendations by stating that imposing only limited regulatory requirements on private placement intermediaries whose activities are restricted to specified parameters, do not hold customer funds or securities and deal only with accredited investors would enhance capital formation and promote job creation without materially undermining investor protections. Presumably, the Committee is asserting that such unregistered intermediaries should be allowed to receive a success fee.

The Committee then made the following recommendations to the SEC:

  1.  Take steps to clarify the current ambiguity in broker-dealer regulation by determining that persons that receive transaction-based compensation solely for providing names of or introductions to prospective investors are not subject to registration as a broker under the Securities Exchange Act.
  2. Exempt intermediaries that are actively involved in the discussions, negotiations and structuring, as well as the solicitation of prospective investors, for private financings on a regular basis from broker registration at the federal level, conditioned upon registration as a broker under State law.
  3. Spearhead a joint effort with the North American Securities Administrators Association and the Financial Industry Regulatory Authority to ensure coordinated State regulation and adoption of measured regulation that is transparent, responsive to the needs of small businesses for capital, proportional to the risks to which investors in such offerings are exposed, and capable of early implementation and ongoing enforcement.
  4. Take immediate intermediary steps to begin to address this set of issues incrementally instead of waiting until development of a comprehensive solution.

A recording of the September 23 Committee meeting could be accessed here.