Finders Keepers: Unlocking Capital for Small Businesses Act

By at 9 September, 2018, 12:05 pm

Small Business Insider

By Karen Kerrigan-

Access to capital is one of SBE Council’s core issues, so we get very excited when legislation is introduced that would make this simpler and easier for entrepreneurs and small businesses.  The “Unlocking Capital for Small Businesses Act” (H.R. 6127) is true to its billing. It would bring clarity to government rules that have created barriers for entrepreneurs as they work to raise capital from potential investors.

U.S. Representative Ted Budd (R-NC) introduced H.R. 6127 earlier this summer, and I had the opportunity to follow his presentation about the bill at the Heritage Foundation on September 5 where I discussed its importance to entrepreneurs on a panel with several experts. (You can watch the event by clicking here, or the image below.)

H.R. 6127 would bring needed clarity to Securities and Exchange Commission (SEC) rules surrounding the important work of people who introduce entrepreneurs to potential investors. These “finders” or private placement brokers are individuals who are paid to assist small businesses in finding capital by making such introductions.  Finders are particularly important to small businesses, as most entrepreneurs do not have access to “accredited investors.” 

In a recent piece by David Burton, Senior Fellow in Economic Policy at Heritage, he explained the legislation and why it is needed:

In 2000, the Securities and Exchange Commission created a regulatory cloud surrounding finders and issuers that use finders. It is time to clarify the regulatory status of finders. Legislation to provide a safe harbor for finders and a reasonable regulatory regime for more active private placement brokers would have a positive impact on the ability of Main Street entrepreneurs to raise capital.

Finders play an important role in introducing entrepreneurs to potential investors, thus helping them to raise the capital necessary to launch or grow their businesses. For regulatory purposes, neither finders nor private placement brokers should be treated the same as Wall Street investment banks (e.g., a large registered broker-dealer).

SBE Council’s agrees, and that is why we support H.R. 6127, which would create a regulatory safe harbor exempting finders from having to register as broker-dealers while creating a lighter regulatory approach for private placement brokers. The scaled approach more appropriately regulates the various players’ activities, and in turn would reduce costs for small businesses while opening opportunities to connect with potential investors.

(Read more about the history of the regulatory cloud and the rationale behind the proposed regulatory regime in Burton’s report, “Let Entrepreneurs Raise Capital Using Finders and Private Placement Brokers.”)

As I relayed in my remarks at the Heritage event, H.R. 6127 is important because:

● It provides an approach (and lifts uncertainty) to rules and regulatory compliance based on a person’s level of engagement with an issuer. Merely introducing an entrepreneur to a potential investor and receiving a “finder’s fee” if that connection has a positive outcome does not require the same regulatory oversight as more complex dealings such as holding investor funds or securities, recommending the purchase of specific securities, and participating materially in negotiations between issuers and investors.

As noted by Burton in his report on this issue, the focus of the law (as written) “is whether a person is ‘engaged in the business’ of ‘effecting transactions in securities’ for the account of others.” Therefore, the regulatory wrench thrown into law about two decades ago with regard to finders is an unwarranted creation of the SEC.

● The bill’s provisions would help to reduce the cost of raising capital and allow entrepreneurs to more easily work with individuals who have strong networks and connections with accredited investors. Lifting the regulatory cloud by providing a safe harbor for finders means that the expensive registration costs associated with being a broker-dealer would not have to be recouped, which usually happens by passing these down to small business owners.

● The legislation would help to open up networks and make better use of connections within networks. Relationships in networks would be more effective and efficient, and would allow individuals to more easily introduce small business owners to potential investors. In effect, the legislation will help to create a market for more finders, which is a good thing because most broker-dealers are not interested in the smaller size investments that are needed by many entrepreneurs.  Wouldn’t it be nice to have more individuals helping entrepreneurs find the capital they need to startup or grow a business?

This legislation is very important to entrepreneurs and small business owners, and SBE Council will be working with Congressman Budd to move it through the U.S. House.  In his remarks at the Heritage Foundation, Congressman Budd said Senator Thom Tillis (R-NC) will spearhead the legislative effort in the U.S. Senate.  This is great news to have the bill introduced in both chambers.

As our members and readers well know, SBE Council is also working hard to advance JOBS Act 3.0 through the Senate. The bill passed the House with massive bipartisan support on July 17, and our goal is to get the legislation to President Trump’s desk as quickly as possible.

The “Unlocking Capital for Small Businesses Act” is another important piece of legislation that fits nicely into our efforts to fix and unwind some of the intrusive, outdated or downright silly rules and red tape that block needed capital for entrepreneurs, and harm capital formation generally.

Karen Kerrigan is president & CEO of the Small Business & Entrepreneurship Council.            

News and Media Releases