Close Close
Popular Financial Topics Discover relevant content from across the suite of ALM legal publications From the Industry More content from ThinkAdvisor and select sponsors Investment Advisor Issue Gallery Read digital editions of Investment Advisor Magazine Tax Facts Get clear, current, and reliable answers to pressing tax questions
Luminaries Awards

Practice Management > Building Your Business

Revisiting Reg D

Your article was successfully shared with the contacts you provided.

Our regular readers do a great job of ensuring I never am at a loss for timely column ideas. Often, the emails and reader comments posted on are angst-ridden rants and rages against the machine; such was the pointed reaction to the January column, “The Good, The Bad and Reg D,” which elicited an unusually vocal and vehement reaction to the impact of private placement regulatory encroachment on the entrepreneurial and startup ecosystem, and sustainable new job creation.

The column chastised the Securities Exchange Commission’s inability to recognize the critical need to enable and facilitate exempted Reg D financings that are responsible for an estimated 30,000 to 50,000 startups and early-stage businesses each year from the hundreds of millions of dollars in fraudulent limited partnerships transactions that regularly emerge in the headlines.

To the contrary, recent legislation implied and enacted under Dodd-Frank and recent SEC musings suggest that regulators still have a baby-bathwater separation anxiety: Their appropriate concern over fraudsters bilking millions from investors in limited partnership schemes overreaches into regulatory encroachment that has a dampening effect on new business and job creation.

Many of the comments I received from readers articulated the strong position that unregistered financial intermediaries should be allowed to receive finder fees for introducing capital to early-stage businesses.

Industry Response
The SEC recently released the final report on the 29th Forum on Small Business Capital Formation that was held in Washington, D.C., in November of last year. The annual forum is mandated by the Small Business Investment Incentive Act of 1980 to provide a “platform to highlight perceived unnecessary impediments to small business capital formation and address whether they can be eliminated or reduced,”—a noble and worthy pursuit by any measure.

In an attempt to provide guidance to the SEC, the final report from the forum listed 36 securities law recommendations in the order of priority established as the result of polling the 60 securities industry trade and legal groups in attendance. The highest ranking recommendation was that “the SEC should specifically consider the impact of rulemaking on small business investing when implementing the Dodd-Frank Act.”

Refreshingly, the consensus recommendations proceeded into more granular and arcane territory. Another recommendation stated that “the Commission should allow ‘private placement brokers’ to assist issuers in raising capital through private placements of their securities offered solely to ‘accredited investors’ in amounts per issuer up to 10% of the investors’ net worth (excluding primary residence) with full written disclosure of the broker’s compensation…in aggregate amounts up to $20 million per issuer.” Specifically, the recommendation is referring to the “gray market” of unregistered securities transactions by so-called “finders” who raise funds on a success fee basis for small businesses in need of seed, bridge, growth or mezzanine financing.

The amount of this activity is hard to quantify, but its importance is not. The July 10 Report and Recommendations of the American Bar Association Task Force on Private Placement Broker-Dealers (PPBDs) recently noted: “[T]he activities of PPBDs [are] of critical importance to the efforts of a vast number of small businesses, and without their assistance it is unlikely that a great percentage of such businesses would ever be successful in raising early stage funding. [...] Small business creation is the key to creating jobs in America. Small businesses create many more new jobs than large public companies who have no need for PPBDs.”

Ultimately, the ABA report issued its own recommendation that “the SEC, NASD, and State Administrators should work to establish a simplified system for the registration of PPBDs” and that PPBDs should be permitted to engage in “limited activities,” echoing a previous recommendation from the same body back in 2005.

Reader Response
Will the SEC take heed? Perhaps not, according to the self-ascribed “rant” that I received from small business corporate finance activist Bob Koveleskie. Koveleskie is the founder and president of, an always-timely online corporate finance resource for entrepreneurs and small businesses. A champion for the thousands of small businesses seeking startup and expansion capital, Bob noted that amidst the backdrop of a stagnant economy, “it is the entrepreneur, startup and middle market businesses trying to raise capital that are getting hurt. [...] Allowing finder’s fees to be paid to unregistered financial consultants would enable billions of dollars to become more accessible to businesses through the efforts of consultants, CPAs and attorneys.


© 2024 ALM Global, LLC, All Rights Reserved. Request academic re-use from All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.