Finders and Unregistered Broker Risk
A person who is paid for finding or introducing investors, especially with a commission based on the money raised, is usually acting as a broker and generally needs to be registered as a broker-dealer. Using an unregistered finder can expose the issuer to rescission claims by investors, regulatory action in the state and at the SEC, and difficulty with later fundraising. The safer routes are paying a registered broker-dealer or not paying for introductions.
Why finders are risky
Federal and Texas securities laws require those who are in the business of effecting securities transactions for others to register. Transaction-based compensation, such as a percentage of money raised, is the strongest sign that a person is acting as a broker. Regularity of activity, involvement in negotiating terms, handling investor funds and advertising the deal add to the picture. The SEC has proposed finder exemptions, but there is no general finder exemption under current law.
Consequences for the issuer
- Rescission rights. Contracts made in violation of the broker registration rules may be voidable, giving investors a right to claim their money back.
- Regulatory action. Both the issuer and the unregistered person can face enforcement.
- State law. The Texas Securities Act regulates dealers and agents, and unregistered sales can lead to penalties.
- Diligence problems. Later investors and lenders may ask about past raises.
What looks like a finder and what does not
| Arrangement | Risk |
|---|---|
| Paying a percentage of the amount raised to someone who introduces investors | High |
| Paying a fixed amount for an introduction with no involvement and no link to the outcome | Lower, but still analyzed on the facts |
| Employees who raise money for the issuer and are not paid on commission | Often lower, with limits |
| A registered broker-dealer paid a placement fee | Compliant, if the broker follows the rules |
Real estate licenses do not help
A real estate broker's license does not authorize selling securities. A real estate agent who brings investors into a syndication for a commission can fall into the same problem as any other finder. Sponsors who use agents to find buyers for real estate should keep that separate from raising investor capital.
Safer alternatives
- Engage a registered broker-dealer to place the offering.
- Raise from your own network without paying for introductions.
- Use a platform that is a registered intermediary.
- If someone helps informally, avoid transaction-based pay and get legal advice first.
See general solicitation and Form D, which asks about sales compensation.
Free consultation with a partner attorney. No cost, no obligation.
Book Free ConsultationFrequently asked questions
Can I pay a friend a thank-you for an introduction?
A payment tied to an investor's investment can create broker issues. Ask a securities lawyer before paying anything linked to a raise.
Do I report finder payments on Form D?
Form D asks about sales compensation and recipients, so payments to those who solicited investors may need to be disclosed.
Is there a finder exemption?
Not under current federal law, though proposals have been made. Texas has its own rules.
Can my employee raise money for me?
Often yes, if not paid commissions and not otherwise acting as a broker. The facts matter.