In this instructional video, securities attorney Kim Lisa Taylor explains why paying a finder or capital‑raiser a percentage of the capital they raise can violate U.S. securities law. She outlines the legal definition of a broker‑dealer under Section 15 of the Securities Exchange Act of 1934 and the SEC’s three‑element test for brokerage activity: (1) helping find investors, (2) receiving transaction‑based compensation, and (3) doing so with regularity. Taylor emphasizes that the label applied to the arrangement (referral fee, finder’s fee, consulting agreement, etc.) does not change the analysis—if the three elements are present, the person is a broker‑dealer and must be FINRA‑registered. She details the consequences for issuers who use unregistered brokers, including investor rescission rights, potential liability for the issuer, and lasting compliance failures that affect future offerings. Taylor then presents compliant alternatives such as using a licensed broker‑dealer, paying non‑transactional marketing fees, or structuring genuine co‑GP arrangements. Finally, she advises issuers with existing arrangements to stop payments, consult a securities attorney, and restructure the relationship to avoid transaction‑based compensation. The video concludes with a call to schedule a consultation and subscribe for more guidance.
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You've got a guy. He knows a lot of investors. He makes introductions. When one of them wires into your deal, you pay him 1% of whatever they invest, sometimes 2%. You've been doing this for a couple of deals now. He's good at it. I need to tell you what the SEC calls that arrangement. My name is Kim Lisa Taylor. I'm a securities attorney and the founder of Syndication Attorneys. This particular issue comes up regularly, not because syndicators are trying to do something wrong, But because the word broker sounds like something formal and Wall Street, it doesn't sound like your buddy who makes introductions for a cut. But that's exactly what the law is about. Let me explain what a broker-dealer is under federal securities law, because the definition controls something here. Under Section 15 of the Securities Exchange Act of 1934, any person who's in the business of affecting transactions in securities for the account of others must be registered as a broker-dealer with FINRA. That's the rule. Now let's look at what affecting transactions in securities means in practice. The SEC uses 3 elements to determine whether an arrangement constitutes brokerage activity. First, is the person helping to find investors? Are they making introductions, identifying prospects, bringing people to the table for a potential investment? Second, is the person receiving transaction-based compensation? Are they paid based on whether the investment happens and how much is invested? A percentage, a flat fee per deal, any amount that's contingent on the transaction closing. Third, is this happening with any regularity? Is this person doing this across multiple deals, multiple investors, as part of an ongoing arrangement? If all 3 of these elements are present, you have a broker-dealer activity. And if that person doesn't hold a FINRA-issued broker-dealer license, you have an unregistered broker violation. The label you put on the arrangement doesn't change the analysis. Referral fee doesn't matter. Finder's fee doesn't matter. Consulting agreement doesn't matter. Strategic partnership doesn't matter. The SEC looks at the substance of what's happening. What is this person doing and how are they being paid for it? Here's where most syndicators get tripped up. They think broker means someone who works at a brokerage house, executes stock trades, has a securities license. They think of Charles Schwab or their financial advisor. That's not what the statute says. The statute says Anyone who affects transactions in securities for the account of others and is in the business of doing so is a broker. No license is required to fall under the definition. You don't need a securities license to be considered a broker. You need a securities license to be a legal broker. The arrangement you have with your capital raiser is a brokerage arrangement. The fact that neither of you thought of it that way doesn't change what it is. And the phrase, it's just a referral fee, doesn't work as a defense. The courts have addressed this repeatedly. A referral that results in a securities transaction for which the person is compensated based on the transaction is brokerage activity. What do the consequences actually look like? The person receiving the payment, your capital raiser, faces potential registration requirements and liability under Section 15. That's their issue, but your exposure as the issuer is likely larger. When a syndicator uses an unregistered broker to raise capital, investors have the right to rescind their investment. Rescission means they can demand their money back without deduction plus interest. It doesn't matter whether the deal is performing. The mechanism that brought them in was unlawful. And depending on the nature of the relationship, you may also face liability under the same statute for having used an unregistered broker. In any regulatory review or investor dispute, the fact that you used an unregistered broker becomes part of your offering history. It's a compliance failure that follows you, not just the deal. What compliant alternatives exist? There's a few, and they matter. If you're going to compensate someone based on capital raised, that person needs to hold a FINRA-issued broker-dealer's license. That's the only compliant version of this arrangement. What's not brokerage? Paying someone for general marketing work or content creation or other services that are not transaction-specific and not contingent on closing of an investment. The compensation has to be for something other than the capital raised or that specific transaction. Co-sponsor or co-GP arrangements. If someone is genuinely a co-GP with meaningful responsibilities in the deal, Compensation structures through that arrangement can work differently, but capital raiser with a GP title doesn't automatically solve the problem if their real function is still just soliciting investors. What should you do if you already have this arrangement in place? First, stop making payments under that arrangement until you've had it reviewed. The ongoing payments are an ongoing violation. Second, talk to a securities attorney about what the arrangement actually looks like And what the exposure is. This is a fact-specific analysis that hinges on how the person is compensated and what they actually do, how many investors they brought in, whether this is ongoing or was it a one-time thing. Third, if your relationship with this person is a genuine business relationship you want to continue, figure out what a compliant arrangement is and don't pay them again until it's in place. They may have to get licensed, or more likely and much easier is to give them a job in management and stop compensating them anyone based on the amount of capital they bring to the deal. So their compensation isn't transaction-based. There are compliant structures, but you need to know whether what you're doing currently is legal. We can look at the facts of your arrangement and tell you exactly where you stand and what it takes to do it right. All you need to do is click the link in the description or visit syndicationattorneys.com/schedule. Subscribe if you want to keep building your syndication practice on solid ground.
