Regulation & Oversight

Tennessee Securities Division Concerned About Unregistered “Finders” Pitching High-Risk Private Offerings

Federal effort will expose more investors to offerings from unregistered and unsupervised financial brokers

NASHVILLE — The Tennessee Department of Commerce and Insurance (TDCI) Securities Division is among 30 state securities regulators to raise concerns about a recent proposal by the U.S. Securities and Exchange Commission (SEC) that would make more investors vulnerable to sales pitches for high-risk private securities from unregistered and unsupervised financial brokers.

TDCI Commissioner Carter Lawrence said the SEC recently released a proposal to order a federal new broker-dealer exemption for private placement finders. “Finders” are individuals who are hired by private companies to locate potential investors.

A November 12, 2020 letter to the SEC signed by TDCI Assistant Commissioner Elizabeth Bowling and nearly 30 state securities regulators throughout the United States said: “This proposal runs directly counter to the public interest and, if ordered, will actually harm rather than protect investors…It is clear that the proposal is not driven by investor protection considerations, but by a purported desire to help small businesses obtain capital. Although that is a worthy goal we all share, small business issuers will not benefit from a federal exemption in the absence of a coordinated state finder registration framework. To be successful, we must work together to develop a balanced and coordinated framework that serves both issuers and investors in the private market.”

The private placement market is a very risky place for investors, especially seniors who have amassed a life’s worth of savings to become so-called “accredited investors,” to which unregistered private offerings are limited.

Unregistered Securities Sold By Unlicensed Intermediaries

According to the North American Securities Administrators Association (NASAA), of which the Tennessee Securities Division is a member, unregistered securities, including private offerings, represent a significant portion of the enforcement actions taken by state securities divisions each year. Many of the worst criminal securities fraud cases arise from the combination of unregistered securities offerings promoted and sold by unlicensed intermediaries.

To be successful, we must work together to develop a balanced and coordinated framework that serves both issuers and investors in the private market...

“Given both perennial concerns about and recent incidents of extraordinarily harmful frauds perpetuated by persons acting as finders, the last thing state securities regulators expected to see was a Commission proposal that facilitates unlicensed intermediaries in the private market,” the letter said.

In the letter, Assistant Commissioner Bowling requested the federal agency provide a full public-rulemaking process for the proposal and defer any action until it has met with state securities regulators regarding the purported need for and propriety of a private placement finder exemption. “There is no doubt in our minds that the Commission and the states, standing together, will be much more effective in protecting our citizens and making the private markets successful for small businesses than we could ever hope to be standing apart,” Bowling said.

Joining the TDCI Securities Division in filing the letter are the securities regulators of Alabama, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, New Jersey, New Mexico, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Texas, Vermont, Virginia, Washington, West Virginia and Wisconsin.

The letter is available here.

 

 

 

About the Tennessee Department of Commerce & Insurance
Fostering fair marketplaces, public safety, and consumer education that promote the success of individuals and businesses while serving as innovative leaders. Our divisions include the State Fire Marshal’s Office, Insurance, Securities, Regulatory Boards, Tennessee Law Enforcement Training Academy, Tennessee Emergency Communications Board and TennCare Oversight.

 

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