Broker-Dealers, Finders & Your Raise: When You Need One

What makes someone a broker-dealer

Under federal securities law, a 'broker' is anyone in the business of effecting transactions in securities for the account of others. Several factors signal broker activity, but one looms largest: transaction-based compensation — being paid based on the success or size of the securities sold.

• Transaction-based pay: a commission, a percentage of the raise, or a success fee tied to closing is the single strongest indicator of broker activity — and the clearest trigger for registration.
• Solicitation: actively finding, pitching, and persuading investors to buy the securities.
• Handling of funds or involvement in the mechanics of the sale.
• Regularity: being 'in the business' of doing this, rather than a one-off.

Why the 'finder's fee' is a trap

Sponsors often hear that they can pay a 'finder' a small fee for an introduction. The narrow reality is that a true finder — someone who merely makes an introduction and does nothing more, paid a flat fee unrelated to whether or how much anyone invests — may fall outside broker registration. But the moment the compensation is tied to the outcome (a percentage of what's raised) or the person does more than introduce (pitches the deal, answers investor questions, helps close), they've crossed into broker territory.

• A flat fee for a pure introduction, with no solicitation and no success-based pay, is the narrow potentially-permissible zone — and even it is legally uncertain.
• A percentage of the raise paid to an unregistered person is almost always a violation, regardless of what you call it.
• The consequences fall on the issuer too: using an unregistered broker can give investors rescission rights (the right to demand their money back) and expose the offering to regulators.
• States add their own broker-dealer rules, so an arrangement that looks borderline federally can still violate state law.

Because the line is so easy to cross and the penalties so severe, the practical advice most securities attorneys give is simple: don't pay unregistered people to raise capital. If you want third-party help selling your deal, use a registered broker-dealer or a registered representative — full stop.

The issuer exemption: raising for your own deal

The good news for sponsors is that you don't need to register as a broker-dealer to raise capital for your own offering. The 'issuer exemption' (Rule 3a4-1, often called the safe harbor) lets the issuer's own people — its officers, directors, and employees — sell its securities without registering, provided they meet certain conditions:

• They are not compensated by commission or other transaction-based pay for the securities sales.
• They are not, and have not recently been, a registered broker-dealer or otherwise subject to disqualification.
• They perform substantial duties for the issuer beyond raising capital, and don't do this as their primary, continuous business of selling securities.
• They limit their solicitation activity in line with the safe harbor's conditions.

This is what lets a sponsor and their genuine team raise for their syndication. The catch is the no-transaction-based-compensation condition: a sponsor can earn their economics through the deal itself (fees and promote as a principal), but can't pay a team member a commission per dollar raised without jeopardizing the exemption. The issuer exemption covers raising for your own deal; it does not let you build a business of raising for others' deals on commission — that requires registration.

What sponsors should actually do

1. Raise for your own deal under the issuer exemption, compensating yourself through the deal's economics (promote and principal fees), not per-investor commissions.
2. If you want outside help selling the deal, engage a registered broker-dealer and pay them properly — that's the compliant path to leveraging someone else's network.
3. Don't pay unregistered finders a percentage of the raise, however the arrangement is labeled.
4. Be cautious even with flat introduction fees, and clear any such arrangement with counsel first.
5. Confirm both federal and state requirements with a securities attorney before structuring any compensation for capital-raising help.

The throughline is that you can raise capital for your own deals freely as a principal, but the moment money changes hands for selling securities to others, registration is almost certainly in play. Most sponsors never need to register because they're raising for their own offerings — the trouble starts only when they try to pay someone else to do it on commission. Keep your compensation structures clean, lean on registered professionals when you need outside distribution, and verify with counsel.