What do I need to know about paying someone to help me find investors?
Takeaway: Paying an unlicensed "finder" a success fee for raising capital is a violation of federal securities law; you must only work with registered broker-dealers to avoid severe legal penalties and the risk of investors rescinding their investment.
As a founder, your network is one of your most valuable assets. It is common for well-intentioned friends, advisors, and consultants to offer to make introductions to their network of potential investors. Often, this offer comes with a proposal: "If the introduction leads to an investment, I get a small percentage as a 'finder's fee'."
While this arrangement may seem logical, it is one of the most dangerous and common legal traps a founder can fall into. Paying transaction-based compensation to an unlicensed individual for raising capital is almost always illegal, and it can have significant adverse consequences for your company.
The Law: Broker-Dealer Registration
The Securities Exchange Act of 1934 is very clear: any person who is in the business of "effecting transactions in securities" for others must be registered with the SEC and FINRA as a broker-dealer. The key trigger for this requirement is transaction-based compensation. If a person's payment is contingent on the success or size of a financing, they are acting as an unregistered broker.
The vast majority of informal "finders" and consultants are not registered broker-dealers.
The Consequences of Using an Unlicensed Broker
Engaging an unlicensed broker creates a major legal and financial liability for your startup.
Rescission Rights: This is the most severe risk. Under federal securities law, a sale of securities made with the help of an unlicensed broker gives the investors the right to rescind their investment. This means that for up to a year after the investment, they can demand their money back in full. A rescission event could bankrupt your company.
Regulatory Enforcement: It can trigger an investigation and enforcement action from the SEC.
A "Tainted" Fundraising: The use of an unlicensed broker is a major red flag that will be uncovered during the due diligence for your next financing round. No sophisticated VC will invest in a company that has a potential rescission liability hanging over its head, which can kill your future fundraising prospects.
The Right Way to Get Help
Engage a Registered Firm: The legally compliant way to hire help for your fundraising is to engage a registered broker-dealer or a placement agent. These firms and their professionals are properly licensed to perform this service.
Pay for Advice, Not Introductions: You can pay a consultant a flat monthly fee or a project-based fee for strategic advice on your fundraising process, such as helping you prepare your pitch deck or build your target investor list. The key is that their compensation must not be tied to the amount of money you raise or the success of the financing.
Do not let the promise of a warm introduction lead you into a major securities law violation. Never agree to pay a success fee to anyone for raising capital unless you have verified that they are a registered broker-dealer.
Disclaimer: This post is for general informational purposes only and does not constitute legal, tax, or financial advice. Reading or relying on this content does not create an attorney–client relationship. Every startup’s situation is unique, and you should consult qualified legal or tax professionals before making decisions that may affect your business.