Understand What Triggers Broker-Dealer Status
Many well-intentioned companies assume a casual “introduction fee” or a one-page finder agreement is benign. In reality, the United States securities laws define broker activity broadly, and seemingly simple referral arrangements can trigger broker-dealer registration requirements under Section 15(a) of the Securities Exchange Act of 1934. You are at higher risk when the finder is paid based on the success of a securities transaction, participates in negotiations, advises on structure or valuation, or engages in persistent solicitation. The Securities and Exchange Commission and many state regulators treat transaction-based compensation as a hallmark of brokerage activity, even if the finder never touches investor funds or does not carry a securities license.
The legal test is facts-and-circumstances driven. The more a finder’s compensation correlates with closing, the more the activity looks like brokerage. It is a common misconception among issuers that a “one-time” success fee means the activity is limited or exempt. The law does not contain a “one-time” exception for success-based compensation in securities offerings. If an unregistered finder solicits investors and is paid upon closing, regulators can view the finder as acting as a broker, exposing both the finder and the issuer to enforcement risk, potential rescission rights for investors, and delays in later financings or exits. A prudent issuer will start with the assumption that any investor-sourcing role is a regulated touchpoint unless structured otherwise under counsel’s guidance.
Why Pure Success Fees Are Especially Risky
There is a pervasive lay belief that success fees are standard and therefore safe. In regulated capital-raising, the opposite is often true. A pure percentage-of-proceeds or per-close fee paid to someone who solicits investors is typically the riskiest compensation structure for an unregistered finder. The Securities and Exchange Commission has long flagged transaction-based compensation as a strong indicator of broker status because it aligns the finder’s economic interests with the outcome of a securities sale. That alignment encourages sales activity, which is precisely the conduct the broker-dealer rules seek to regulate for investor protection.
Even if a finder merely “makes introductions,” payment upon investment closing can be enough to raise concerns. Many point to famous staff letters or anecdotes where someone received a fee for introductions, but those instances were either highly fact-specific, outdated, or misapplied by non-lawyers. The persistent myth that a “finder exemption” exists at the federal level has led to costly enforcement actions and broken deals. Without careful structuring under experienced counsel, a pure success fee paid to an unregistered person who had any solicitation role can taint the entire round, complicate future diligence by institutional investors, and invite rescission claims by purchasers.
When a Broker-Dealer Is Required and When It Is Not
There are legitimate circumstances where a broker-dealer is required and others where it is not. If a person is regularly engaged in soliciting investors, evaluating investor suitability, negotiating terms, or receiving compensation tied to closings, the prudent assumption is that broker-dealer registration may be required. By contrast, certain narrow activities can sometimes be structured safely without a broker-dealer, such as a compensated marketing agency providing general brand awareness services unrelated to specific securities, or a consultant paid a fixed fee to refine pitch materials without contacting investors. However, the boundary between marketing and solicitation can blur quickly; an email introducing a specific offering or a warm handoff to a targeted investor list can transform a marketing engagement into a solicitation activity.
It is also critical to distinguish M&A activity from capital raising. Congress enacted a limited statutory exemption for certain “M&A Brokers,” but that exemption does not authorize the solicitation of investors for capital formation. It is limited to qualifying transactions involving transfers of ownership of a privately held company, under prescribed criteria. Many mistakenly treat that exemption as a green light for finder fees in fundraising. It is not. Issuers should consult counsel to determine whether a qualified broker-dealer is necessary for the contemplated activities, and to document the scope of work to avoid creeping into regulated territory.
Practical Compensation Models That Reduce Regulatory Risk
To minimize the risk of being characterized as paying an unregistered broker, consider compensation structures that do not hinge on the closing of a securities transaction and that limit the scope of activity. Common models include a fixed monthly retainer for defined deliverables, an hourly or project-based fee for services like preparing data rooms and investor materials, and milestone payments for non-solicitation tasks such as branding assets, financial modeling, or post-investor-onboarding administration. The key is to decouple payment from whether investors invest, and to constrain the finder from communicating with investors about specific terms of the offering or the merits of the investment.
A more robust structure involves engaging a registered broker-dealer for activities that involve solicitation or the presentation of specific investment terms. In some cases, a mixed model is appropriate: retain a consulting firm for pre-offering support under a fixed-fee statement of work, and separately contract with a broker-dealer for investor outreach, suitability, and transaction execution. When an issuer truly needs introductions from industry contacts, a carefully drafted agreement can compensate the introducer for curated lists or attendance at a non-deal roadshow without paying per-close fees, provided the introducer does not discuss terms or induce investment. Counsel should review the scope to ensure activities do not inadvertently become solicitations.
Drafting a Finder or Consulting Agreement That Holds Up in Diligence
A defensible agreement does more than state a fee; it delineates prohibited conduct, compliance obligations, and termination mechanics. A well-drafted arrangement typically includes: a scope of services limited to non-solicitation tasks; a compensation schedule that avoids transaction-based triggers; compliance covenants that the consultant will not solicit or provide investment advice, will not negotiate terms, and will comply with federal and state securities laws; no-agency and no-authority clauses; careful confidentiality terms; and a representations and warranties section where the consultant confirms it is not and will not act as a broker without appropriate registration.
Issuers should also include practical protections that sophisticated investors look for during diligence: a tailored indemnification provision for regulatory breaches by the consultant; a tail period that applies only to introductions evidenced in writing and limited in duration; exclusivity avoided unless commercially necessary; and termination for convenience to cease work immediately if risk increases. Payment provisions should require a completed Form W-9 or appropriate foreign status certification, set clear invoicing intervals, and condition payment on documented deliverables rather than closing events. The agreement should expressly prohibit the consultant from sharing offering materials with prospective investors or hosting investor-specific meetings absent broker-dealer involvement.
Setting Boundaries Around Investor Contacts and Communications
Even carefully structured fees can be undermined by loose communications. Provide written playbooks that delineate who may speak to investors, what may be said, and through which channels. A non-broker consultant should be barred from discussing the terms of any securities offering, from addressing investor suitability or accreditation, and from handling questions regarding performance, valuation, or risk factors. Communications from the consultant should remain at the level of corporate awareness or industry thought leadership, not deal-specific content. Any investor-facing presentation that references an offering, allocation, pricing, or timelines should be handled by the issuer’s officers or a registered intermediary.
Maintain documentation. Preserve copies of emails, call agendas, and materials to evidence that the consultant’s role stayed within agreed boundaries. A common pitfall occurs when a consultant forwards offering documents to a curated list with a personal endorsement. That is solicitation. Train teams to route all offering inquiries to the designated registered broker-dealer or authorized issuer representative. Implement approval workflows for public-facing materials to avoid inadvertent general solicitation in offerings that require quiet marketing, such as Rule 506(b) placements. Clear boundaries are not simply a legal technicality; they are critical for preserving exemptions and investor protections.
Federal, State, and International Nuances That Complicate the Picture
There is no single national “finder rule” that blesses referral fees in all contexts. While federal law governs broker-dealer registration, states impose their own “blue sky” statutes that can be stricter or differently interpreted. Some states afford limited accommodation for certain finders; others do not. Engaging a consultant to source investors in multiple states can therefore create a mosaic of obligations, each with its own enforcement posture. Before any outreach, counsel should map the investor geographies and analyze state-level registration triggers, notice filings, and exemptions, understanding that the law often keys off the location of the investor, the issuer, and where the solicitation occurs.
International overlays add further complexity. A non-U.S. finder who uses U.S. emails, phone lines, or other interstate means to solicit U.S. investors can still trigger U.S. requirements. Conversely, paying a foreign finder may create tax withholding obligations for the issuer, discussed below. Anti–money laundering and sanctions regimes must also be considered when hiring third parties to assist with investor touchpoints. When in doubt, structure the engagement narrowly, avoid success-based fees, and route any investor solicitation through a registered broker-dealer experienced with cross-border rules. The incremental cost of compliance is far less than the cost of remediation if a round is tainted by unlawful solicitation.
Tax Treatment of Finder and Advisory Fees
Compensation structure has material tax consequences in addition to regulatory risk. For the issuer, amounts paid to consultants for general advisory services are typically ordinary and necessary business expenses potentially deductible under Section 162, but capital-raising costs associated with issuing stock are generally not deductible and must be capitalized as a reduction of paid-in capital. In M&A contexts, success-based fees are presumptively facilitative and capitalizable under Treasury Regulations Section 1.263(a)-5; taxpayers may elect a safe harbor to currently deduct a portion in certain qualifying transactions, but stringent documentation is required. The practical upshot is that labeling a payment a “success fee” can both increase securities law risk and reduce current tax benefits.
For the recipient, finder or consulting fees are generally ordinary income subject to Form 1099-NEC reporting if paid to a U.S. non-employee. Worker classification must be evaluated under IRS and state rules to avoid misclassification penalties; however, paying as an independent contractor does not cure broker-dealer issues. If the payee is foreign, the issuer must analyze whether U.S. withholding applies. Services performed wholly outside the United States by a foreign person may be foreign-source income not subject to U.S. withholding, but mixed services, travel days, and permanent establishment concerns can change the result. Collect appropriate Forms W-8, evaluate backup withholding exposure, and coordinate the engagement with tax counsel to avoid under-withholding or reporting failures.
Special Considerations for Private Placements and Crowdfunding
Under Rule 506(b) private placements, issuers must avoid general solicitation. An overeager consultant who blasts offering information on social media or email can inadvertently destroy the exemption. Even in Rule 506(c) offerings that permit general solicitation, the issuer remains responsible for verifying accredited status and ensuring that any third-party outreach complies with anti–fraud rules. Paying a non-registered person a success fee for steering accredited investors is still problematic; 506(c) changes the marketing rules, not broker-dealer registration requirements. For Regulation Crowdfunding, only registered intermediaries may host offerings, and the rules tightly regulate compensation and solicitation. A “finder” cannot lawfully act as a crowdfunding intermediary without registration.
Documentation discipline is crucial across all exemptions. Maintain investor qualification records, subscription processes, and communications logs. If a consultant is involved, keep their work product and time records to show non-solicitation tasks. Where a broker-dealer is engaged, ensure engagement letters are current, that the broker-dealer is licensed in applicable states, and that selling agreements reflect permissible activities. During later financings or diligence by a strategic acquirer, clean records demonstrating compliance will speed approvals and reduce price chips associated with regulatory remediation.
Common Myths About the So-Called “Finder Exemption”
Market folklore persists that federal law allows a narrow “finder” exception for introductions. This misunderstanding often traces to a handful of old, highly factual staff positions and a notorious anecdote involving a celebrity who received a fee for a one-off introduction under unusual constraints. Those fact patterns do not translate to modern capital raising. They typically involved a pre-identified investor, the absence of negotiations, no transaction-based compensation, and specific investor sophistication. Cherry-picking those elements while ignoring the broader regulatory framework is hazardous. In current practice, staff guidance has tightened, states are active, and enforcement efforts remain focused on unregistered solicitation.
Another myth is that “if the investor is accredited, it is fine.” Investor status does not sanitize the conduct of the finder or issuer. The accreditation of the purchaser affects suitability and certain exemption availability, but it does not authorize unregistered brokerage activity. Likewise, adding disclaimers such as “not a broker” or “no advice provided” does not override the substance of the conduct. Regulators analyze what actually occurred, not what the contract says should occur. If the economic reality is that a person was incentivized and paid for inducing a securities purchase, the risk profile is significant regardless of disclaimers.
Step-by-Step Plan to Structure a Compliant Engagement
First, define the business objective with precision. If the need is true investor solicitation, retain a registered broker-dealer and allocate those responsibilities accordingly. If the need is broader operational support, draft a consulting scope that excludes investor-facing activities and prohibits deal-specific communications. Second, design the compensation model to avoid success-based triggers: use fixed fees, hourly rates with caps, or milestones that correspond to deliverables unrelated to investment closings. Third, insert robust compliance covenants, no-authority language, and an explicit prohibition on solicitation or investment advice by the consultant.
Fourth, implement operational controls. Train the consultant and internal team, route investor inquiries to authorized personnel, and centralize control of offering materials. Fifth, plan tax and payment mechanics from the outset: collect appropriate tax forms, determine reportability and withholding, and memorialize invoicing and approval processes. Sixth, perform a state-by-state and, if relevant, cross-border analysis based on expected investor geographies. Finally, monitor and document performance; if scope creep occurs, pause and consult counsel. Updating agreements and bringing in a broker-dealer midstream is far preferable to retroactive remediation after an offering has launched.
Preparing for Diligence by Investors, Lenders, and Acquirers
Sophisticated counterparties increasingly scrutinize how prior capital raises were conducted. Expect requests for copies of finder or consulting agreements, evidence of broker-dealer involvement where relevant, communications logs, and proof that investor outreach complied with applicable exemptions. If a deal team identifies unregistered finder activity, they may demand indemnities, purchase price adjustments, or pre-closing undertakings to resolve potential rescission exposure. Companies that maintain clean, well-documented engagement structures typically move faster through diligence and preserve valuation.
In anticipation of scrutiny, maintain a central repository of executed agreements, engagement letters with any broker-dealers, evidence of state notice filings if applicable, and training materials provided to consultants. Where a consultant was terminated for scope creep, memorialize the reason and confirm cessation of outreach. Transparency with counsel allows for early mitigation steps, such as investor ratification letters where appropriate or restructuring future rounds to remove risk. Addressing these issues proactively not only reduces legal exposure but also signals governance maturity to prospective investors and buyers.
When to Involve Experienced Counsel and Compliance Professionals
The interplay between compensation structure, scope of services, offering exemptions, state law, and tax treatment is more intricate than it first appears. Even experienced businesspeople frequently underestimate how quickly a helpful introduction can become a regulated solicitation when paired with the wrong fee structure. Legal and compliance professionals can help right-size the engagement: prescribing what the consultant may do, selecting compensation models that lower risk, and ensuring that broker-dealer participation is obtained where necessary. They also bring a real-world view of regulator expectations and investor diligence standards that is difficult to replicate without specialized experience.
Engage counsel before pen meets paper. A quick review of a proposed finder or consulting agreement often surfaces inexpensive adjustments that materially reduce risk, such as removing per-close triggers, tightening scope, or restructuring payments as fixed-fee deliverables. Coordination with tax advisors ensures that payments are classified, documented, and reported correctly, and that capitalization versus expense treatment is addressed upfront. The cost of proper structuring is modest compared to the disruptions, penalties, and valuation impact that can follow from noncompliant finder arrangements.
Key Takeaways and Action Checklist
Companies can leverage external resources to support capital formation without running afoul of broker-dealer rules, but success requires discipline. Avoid pure success fees to unregistered persons, constrain scopes to non-solicitation activities, and channel any investor outreach through a registered broker-dealer. Document every boundary in the agreement and in practice, and train all participants accordingly. Perform a multijurisdictional analysis early, because blue sky and international rules add layers of complexity. Finally, align legal structure with tax treatment to avoid unpleasant surprises at year-end or during diligence.
A practical starting checklist includes: defining the engagement objective; selecting a non-transactional compensation model; drafting a detailed scope with compliance covenants; engaging a broker-dealer for any solicitation; establishing communication protocols; collecting tax documentation and setting invoicing controls; mapping state and international considerations; and implementing ongoing monitoring with counsel’s oversight. Treat this as a living framework rather than a one-time task. As the capital plan evolves, revisit the structure to ensure continuing compliance and to preserve the credibility that investors demand.
This material is for informational purposes only and does not constitute legal, tax, or investment advice. Retain qualified counsel and a licensed broker-dealer where appropriate before implementing any arrangement described herein.
