Finders Keepers

The SEC is hearing new demands to make it easier for small companies to raise capital.

It’s no secret that small businesses have an especially hard time raising capital. But risk-averse banks and investors don’t deserve all, or perhaps even most, of the blame, according to some observers. The real culprit, they charge, is federal regulation — in particular, a 70-year-old rule that bars companies from hiring unregistered intermediaries, or “finders,” to help them raise money.

The rule, part of the Securities Exchange Act of 1934, was obviously designed to keep middlemen from engaging in securities fraud and other unsavory financial activities (see “Under the Radar,” at the end of this article). But critics believe the rule has outlived its usefulness. One is Bill Evers, a retired attorney in San Francisco who is trying to start a chain of weight-management clinics but is unsure where to turn for financing. Evers complains that traditional sources for start-ups, such as venture capitalists, are now more interested in providing second- or even third-round financing, or in refinancing better-established but struggling companies.

Meanwhile, says Evers, small, federally registered broker-dealers that might once have provided capital have either gone under or merged into larger investment banks that don’t consider start-ups worth their time. “The system starves start-ups,” he insists. While Evers says legitimate but unregistered finders are common, he complains that the rules make them publicity-shy. As a result, he says, “small-business guys can’t find the finders.”

Support for Evers’s views comes from the CEO Council, a group representing some 200 senior executives of public companies whose stocks trade in the over-the-counter market and 150 broker-dealers that back their deals and execute their transactions. In recommendations recently delivered to the Securities and Exchange Commission, the council noted that “a major difficulty facing small business is obtaining equity capital,” and that the current regulatory environment, including registration rules for broker-dealers, “unfairly restricts capital formation for small businesses.”

Such groups have sought relief from the SEC for years, most recently at a forum on small-business capital formation that the commission held last September. But so far, their demands have fallen on deaf ears. Brian Bussey, assistant chief counsel for the SEC’s division of market regulation, told the forum that “the possibility of lesser regulation…is a massive undertaking,” and indicated that the commission has yet to receive hard evidence of how companies are being hurt by its broker-dealer registration rules.

A License to Deal

Now, however, the SEC is facing new pressure to reconsider its stance. A task force of the American Bar Association (ABA) has been studying the issue since 2002, and is expected to offer its recommendations to the SEC around the time of the ABA’s spring meeting next month. Although details weren’t available as this article went to press, experts familiar with the task force’s deliberations expect it to recommend that the SEC ease its registration requirements under certain circumstances.

“It is time to seek out a way to permit the capable, honest financial intermediaries who are not presently registered to find a means to attain compliance,” stated Hugh Makens, a former securities commissioner for the state of Michigan and a partner in law firm Warner Norcross & Judd LLP in Grand Rapids, in a report he presented at the SEC forum.


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