Finder vs. Broker-Dealer: The Legal Risk of Paying for Investor Intros

Raising capital is hard, and people who promise investor introductions are everywhere. Many offer to connect founders with investors in exchange for a success fee: a percentage of the money raised. It sounds reasonable. Under US securities law, it can be a serious problem.

Paying someone a commission for raising capital can mean paying an unregistered broker-dealer, which can create legal risk for both the intermediary and the company. This guide explains where the line is, what can go wrong and how to get help raising capital safely.

1. The Basic Rule

Under the Securities Exchange Act of 1934, people in the business of effecting transactions in securities for others generally must register with the SEC as broker-dealers and join FINRA, the industry's self-regulatory organisation. Raising capital for startups can fall within that definition.

Regulators look at several factors, but the most important is transaction-based compensation: payment that depends on whether, or how much, money is raised. Success fees are the classic warning sign.

2. Finder vs. Broker

• A finder generally makes an introduction and nothing more, without negotiating terms, advising investors, handling funds or being paid based on the success of the raise.
• A broker-dealer actively solicits investors, recommends investments, negotiates terms, handles documents or funds, and is often paid a commission.

In practice the line is blurry. There is no general federal finder exemption. The SEC proposed a limited exemption for finders in 2020, but it was not adopted. A few states have created limited finder regimes, but these do not resolve federal requirements.

3. What Can Go Wrong

• Rescission risk. Investors in a round involving an unregistered broker may be able to seek to unwind their investment and get their money back.
• Regulatory action against the intermediary and, in some cases, scrutiny of the company.
• Due diligence problems. Future investors and acquirers may flag unregistered broker payments as a liability. See due diligence red flags.
• Disclosure issues in future offerings.
• State law consequences, since states also regulate broker activity.

4. Safer Ways to Get Help Raising Capital

• Registered placement agents and investment banks that are FINRA members can be paid success fees. See placement agents.
• Advisers paid fixed fees for preparing materials, strategy or financial modelling, not tied to capital raised. Take legal advice, as structure and activities still matter.
• Registered funding portals under Regulation Crowdfunding. See our map of US fundraising exemptions.
• Warm introductions from investors, founders and advisers who are not paid for them.
• Investor networks and events that connect founders and investors without taking commissions on capital raised.

5. A Separate Exemption for M&A Brokers

Since 2023, US federal law has included an exemption for certain M&A brokers facilitating the sale of privately held companies. It applies to mergers and acquisitions, not to raising capital from investors, so it does not help founders paying for fundraising introductions.

6. Practical Checklist for Founders

1. Ask whether any intermediary is registered as a broker-dealer and check FINRA's BrokerCheck.
2. Avoid success fees to unregistered people.
3. Put any engagement in writing and have a securities lawyer review it.
4. Disclose intermediary arrangements to investors and your counsel.
5. Keep records of who introduced which investors and how they were paid.

Frequently Asked Questions

Can I pay someone a percentage of the money they help me raise?

Only safely if they are a registered broker-dealer. Paying unregistered people success fees can create significant legal risk.

Is paying a flat fee for introductions always safe?

Not always. Regulators look at the full range of activities, not just how payment is structured. Take legal advice.

What is BrokerCheck?

A free FINRA tool for checking whether a person or firm is registered as a broker-dealer or investment adviser.

Do investor events and networks count as brokers?

It depends on how they operate and are paid. Networks that do not take transaction-based compensation or act in brokering roles are generally in a different position.

The Bottom Line

Success fees for investor introductions are a classic red flag under US securities law. Founders should use registered intermediaries for commission-based fundraising help, avoid paying unregistered finders based on capital raised, and involve securities counsel before signing any agreement.

Global Capital Network connects founders and investors through our events and investor network. Get in touch to learn more.

This article is general information, not legal advice. Securities rules are complex and fact-specific; consult a securities lawyer.