March 1, 2017
VIA US MAIL
Senator Dean Heller
324 Hart Senate Office Building
Washington, DC 20510
Re: A Proposal to Allow Unregistered Finders to Assist Small Businesses Raise Money
Dear Senator Heller:
I write to encourage you to support legislation that would codify the “finder’s exemption” to broker dealer registration under Section l 5(a) of the Securities Exchange Act of 1934 (the “Exchange Act”).
I have practiced law in Silicon Valley since 1991, and prior to that in New York City and Fargo, North Dakota. Throughout my career, I have been focused on service the needs of small and start-up companies. In the recent years, I have seen an entire ecosystem eliminated by regulatory fiat, and I suggest that the senate address by legislation an economically inefficient and harmful regulatory practice.
For many years, the SEC has allowed small businesses to engage unlicensed finders to assist them in raising money. These finders served a valuable role in the fundraising process, putting investors in touch with companies who were seeking capital, typically in transactions that were too small to attract the attention of highly regulated and high overhead broker-dealers. Over the past several years, however, the “finder’s exemption” has been steadily eroded by the SEC to the point where unregistered “finders” no longer exist. Instead, startups and small businesses are on their own if they seek funds of less than the large amounts that broker-dealers require to justify the high costs of doing business. The regulatory repeal of the finder’ exemption has outlawed an entire industry, with no legislative action at all, and for no apparent rational reason.
Entrepreneurs fund their business ventures by finding private investors, known as angel investors, who provide start-up financing in exchange for equity or convertible debt. Entrepreneurs and angel investors often find each other through online crowdfunding platforms or in-person angel forums. Angel forums regularly take a commission for effecting, or at least facilitating, securities transactions. If an unregistered finder accepts a fee based on the success of a transaction, the SEC is likely to find a violation of the Exchange Act regardless of the finder ‘s level of participation.
Section 15(a) of the Exchange Act requires brokers and dealers to register with the SEC unless an applicable exemption is available. A broker is defined as “any person engaged in the business of effecting transactions in securities for the accounts of others.”  A dealer is defined as a person that is “engaged in the business of buying and selling securities” as part of a regular business for such person’s own account. There is no definition of finders, or a corresponding exemption, but at one time they were prevalent in the world of start-up financing.
The finder’s exemption originated in the early 1990s from a no-action letter granting relief to Paul Anka  This letter’s set of facts, which consisted of the sale of a rolodex by Anka, created the finder’s exemption. Accordingly, the exemption is limited to a narrow set of facts that fail to show sufficient broker or dealer activity requiring federal registration .
The SEC staff has subsequently indicated its disapproval of this no-action position. Its new position finds that one instance of transaction-based compensation may be enough to show a person was “engaged in the business” of broker-dealer activity. This broad definition of broker-dealer activity has all but eliminated the finder ‘s exemption within the SEC’s enforcement division.
Failure to register as a broker-dealer can constitute a violation of Section 15(a) of the Exchange Act. The SEC has the power to impose sanctions (including the rescission of past securities offerings) for Section 15(a) violations. The SEC regularly brings enforcement actions against unregistered finders for receiving transaction-based compensation. The SEC’s brief to the 11th Circuit in the Kramer case provides a summary of the SEC’s current view of unregistered finders. In other words, any commission payment will cause the recipient to be categorized as an unregistered broker-dealer. Courts appear to be more willing to allow for the possibility that someone claiming to be a finder may not, in fact, be in the business of “effecting” transactions in securities. Consequently, there is judicial support for finders to take percentage-based compensation without having to register as brokers or dealers. These courts generally hold something more than just transaction-based compensation is necessary to require broker registration. 
 Section 3(a)(4)(A), Securities Exchange Act of 1934.
 Section 3(a)(S)(A)-( B), Securities Exchange Act of 1934.
 See Paul Anka, SEC No-Action Letter (available July 24, 1991).
 See Record of Proceedings of 2008 Annual SEC Government-Business Forum on Small Business Capital Formation (Nov. 20, 2008); Brumberg, Mackey & Wall , SEC No-Ac ion Letter (available May 17, 2010) (reiterating that the receipt of transaction-based compensation is the hallmark of broker-dealer activity).
 See Section 8A of the Securities Act of 1933, Sections 15(b) and 21C of the Securities Exchange Act of 1934, Section 9(b) of the Investment Company Act of 1940, and Sections 203(f) and (k) of the Investment Advisers Act of 1940.
 SEC v. Kramer, 778 F. Supp. 2nd 1320 (M.D. Fla. 2011).
 See SEC v. Kramer, 778 F. Supp. 2nd 1320 (M.D. Fla. 201 1 ); see also SEC v. Benger, in the U.S. District Court for the Northern District of Illinois, No. 09 C 676, Memorandum Opinion and Order (Mar. 28, 2013) (rejecting the SEC’s argument that anyone who facilitates any transaction in securities through conduct in the United States must register as a broker under Section 15(a) of the Exchange Act, even if the transaction did not involve the domestic sale of stock); but cf. In re Ambit Capital Pvt . Ltd., Order Instituting Administrative Proceedings, SEC Release No. 34-68295 (Nov. 27, 2012), In re Motilal Oswal Securities Limited, Order Instituting Administrative Proceedings, SEC Release No. 34-68296 (Nov. 27, 2012), In re JM Financial Institutional Securities Private Limited, Order Instituting Administrative Proceedings, SEC Release No. 34-68297 (Nov. 27, 2012), and In re Edelweiss Financial Services Limited, Order Instituting Administrative Proceedings, SEC Release No. 34-68298 (Nov. 27, 2012) (charging four financial services firms based in India for providing brokerage services to institutional investors in th e United States without being registered with the SEC).
Notwithstanding court precedent, the awesome enforcement power of the SEC and its heavy-handed approach to finders has all but eliminated the finder’s exemption. The question remains whether this Congress intends to override or endorse the judicial view regarding the ability of true finders to accept transaction-based compensation.
The purpose of the SEC is to protect investors, not to increase the transaction costs of start-up financing by regulating finders. Registration under these circumstances is not only inefficient but receives inconsistent treatment from the SEC and courts on appeal. The federal securities law should be liberalized to explicitly exclude finders from broker-dealer registration. Appropriate legislation will increase economic efficiency by lowering transaction costs associated with the present law’s uncertainty as well as resolve court splits within the judicial system.
I would be happy to share my experience in this area with any member and am available to testify on any relevant legislation.
Very truly yours,
ROYSE LAW FIRM, PC
Attorney At Law