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The Finder Fee Trap: Investor Introductions Gone Wrong

The Finder Fee Trap: Broker-Dealer Registration Risks for Startup Investor Introductions

Someone you trust tells you they know an investor. The investor has money, is interested in your space, and is willing to take a meeting. All your contact asks for in return is a small piece of equity if the deal closes. It feels like the most natural arrangement in the world. A friend helping a friend, with a little upside if it works out.

This is one of the most common ways early-stage companies find capital. It is also, under federal securities law, one of the most legally hazardous. The arrangement described above, in which an unregistered person receives compensation tied to the success of a securities transaction, implicates the broker-dealer registration requirements of the Securities Exchange Act of 1934. Getting this wrong does not just create a regulatory technicality. It can give the investor a right to demand their money back, expose the company to federal enforcement liability, and jeopardize the exemptions the company relied on to raise capital in the first place.

This article explains why, what the actual risks are, and how to structure these arrangements so they hold up.

In this article:

I. The Legal Framework

A. The Registration Requirement

Section 15(a)(1) of the Securities Exchange Act of 1934 (the "Exchange Act") makes it unlawful for any "broker" to effect transactions in securities, or to induce or attempt to induce the purchase or sale of any security, unless registered with the SEC.[^1] The Exchange Act defines a "broker" broadly as "any person engaged in the business of effecting transactions in securities for the account of others."[^2] The statute contains no minimum transaction count and no dollar threshold. Courts apply a totality-of-the-circumstances analysis, examining the nature and regularity of a person's participation in securities transactions to determine whether the line from casual introduction to regulated broker activity has been crossed.[^3]

B. What Triggers Registration

The SEC, FINRA, and federal courts have identified a range of activities that indicate a person is acting as a broker and should be registered. These include: receiving transaction-based compensation (i.e., a fee, commission, or equity grant contingent on the closing or size of a securities transaction); soliciting or recruiting investors; participating in negotiations over deal terms; advising investors on the merits or structure of an investment; pre-screening potential investors for eligibility; distributing offering materials, subscription documents, or due diligence packages; handling investor funds or securities; and having a pattern of facilitating securities transactions for compensation.[^4]

Of these, transaction-based compensation is the single most important factor. The SEC has described it as "the hallmark of a salesman."[^5] Courts treat it as a strong, often pivotal indicator of broker activity, though it is technically one factor among several in the totality-of-the-circumstances analysis and does not alone establish broker status.[^6]

Conversely, an intermediary is less likely to be deemed a broker if the person's involvement is limited to making introductions without further participation in discussions between the issuer and the investor; the compensation is a flat fee not tied to the success or size of any transaction; the person does not assist in structuring, negotiating, or advising on the investment; and the person does not handle funds, securities, or offering documents.[^7] But no single factor is safe in isolation, and the SEC has taken the position that even a flat fee paid more than once can indicate broker activity.[^8]

One partial safe harbor worth noting: Exchange Act Rule 3a4-1 provides that an officer, director, or employee of the issuer who participates in selling the issuer's own securities will not be deemed a broker, provided the person is not compensated based on securities transactions, is not associated with a broker-dealer, is not subject to statutory disqualification, and limits sales activity in scope and frequency.[^9] This means a genuine insider of the company (not someone brought on solely for the purpose of making introductions) can participate in the company's capital raise without triggering registration, so long as they are not paid transaction-based compensation for doing so. The rule does not help a third-party finder, and it does not help a company that brings someone on as an officer or advisor specifically to circumvent the registration requirement. The SEC looks at substance, not titles.

C. No Federal Finders Exemption Exists

Despite how common these arrangements are in practice, there is no statutory or regulatory exemption for "finders" under federal securities law. The only federal guidance comes from a series of narrow, fact-specific SEC no-action letters, the most notable being the 1991 Paul Anka letter, in which the SEC staff indicated it would not recommend enforcement against an individual who provided a list of accredited investor names and contact information to an issuer in exchange for a transaction-based fee, where the individual had pre-existing relationships with the investors and had no further involvement in the transaction.[^10]

That letter was narrowly tailored and cannot be relied upon broadly. The SEC has more recently suggested a more aggressive interpretation than was granted to Anka in 1991.[^11] In 2020, the SEC proposed a two-tiered conditional exemption that would have permitted certain natural persons to receive transaction-based compensation for limited finder activities involving accredited investors. The proposal distinguished between "Tier I Finders" (limited to one introduction per 12-month period with no investor contact beyond providing names) and "Tier II Finders" (permitted to identify, screen, and contact investors, distribute offering materials, and arrange meetings, but prohibited from advising on valuation, negotiating terms, handling funds, or preparing sales materials).[^12] Both tiers would have required written agreements with the issuer, and Tier II finders would have been required to provide written disclosure to investors regarding the finder-issuer relationship and obtain written acknowledgment before investment.

That proposal was never adopted. The SEC's Small Business Capital Formation Advisory Committee revisited the topic in July 2025, with SEC Chairman Paul Atkins and Commissioner Hester Peirce both signaling support for regulatory relief.[^13] Commissioner Peirce noted that finders "play a crucial role, particularly for small businesses, by connecting entrepreneurs and investors" and that "well-intentioned friends, colleagues, and industry acquaintances may find themselves unwittingly acting as broker-dealers."[^14] But as of the date of this article, no final rule or exemptive order has been issued. Federal broker-dealer registration requirements remain in full effect with respect to finder activity.

D. State Law Adds Another Layer

The federal analysis is only half the picture. Each state maintains its own broker-dealer and agent registration requirements, independent of and in addition to federal law. A handful of states (including California and Texas) offer limited registration pathways for intermediaries, but these are effective only within the issuing state and come with their own conditions and limitations. In most states, there are no exceptions. The proposed federal finders exemption, even if eventually adopted, would not preempt state law. Companies relying on Regulation D are also required to disclose the identity of any intermediary on Form D filed with the SEC, which can itself trigger state regulatory scrutiny.

II. What Happens When It Goes Wrong

The consequences of engaging an unregistered broker-dealer to facilitate an investor introduction are borne primarily by the company, not the finder. And they tend to surface at the worst possible time: mid-diligence in a later financing round, during a dispute with the investor, or when the company can least afford to return capital.

A. Investor Rescission

Section 29(b) of the Exchange Act provides that every contract made in violation of the Exchange Act "shall be void" as to the rights of the person who created or engaged in the performance of the violating contract.[^15] Courts have interpreted this to grant investors a private right of action for rescission where an issuer used an unregistered broker to facilitate the investment.[^16] To prevail, an investor must establish three elements: contractual privity with the defendant, a contract involving a prohibited transaction, and that the investor is within the class of persons the Exchange Act was designed to protect.[^17] The remedy is equitable: the court unwinds the transaction and restores the parties to their pre-contractual positions, which typically includes return of the investor's principal and may include interest.[^18]

Rescission claims under Section 29(b) are subject to a one-year since discovery / three-year since occurrence limitations period.[^19] But because investors often do not learn of the finder arrangement until diligence in a later financing round or in connection with a dispute, the effective window can extend well beyond the original closing. The claim is most commonly asserted when an investor wants out for reasons that have nothing to do with the finder arrangement itself.

B. Aiding and Abetting Liability

Section 20(e) of the Exchange Act provides that any person who "knowingly or recklessly provides substantial assistance to another person" in violation of the Exchange Act is deemed to be in violation to the same extent.[^20] The SEC applies this to companies that engage unregistered finders, on the theory that the issuer "caused" the finder's violation of Section 15(a) by retaining and compensating the finder for broker activities.

This is not theoretical. In a 2013 enforcement action, the SEC charged Ranieri Partners LLC with causing a consultant's violation of Section 15(a). The consultant had received approximately $2.4 million in transaction-based compensation while engaging in activities including distributing private placement memoranda and subscription documents, sharing confidential information about other investors' capital commitments, and urging at least one investor to adjust portfolio allocations. The firm paid a $375,000 civil penalty; its senior managing partner was personally suspended from association with any broker, dealer, or investment adviser for nine months and fined $75,000; and the consultant was barred from the securities industry. The respondents settled without admitting or denying the allegations.[^21] More recent enforcement actions in 2024 and 2025 have continued this pattern, including proceedings against individuals who solicited investments and received transaction-based compensation without registration.[^22]

C. Loss of Private Placement Exemption

Use of an unregistered broker in connection with a Regulation D offering can put the entire offering at risk, not just the single investment the finder helped arrange. The threat comes from two directions.

First, the contracts underlying the investment may be voidable under Section 29(b) of the Exchange Act, as discussed in Section II.A above. If the finder's involvement constituted unregistered broker activity, the securities purchase agreements facilitated by the finder are tainted by that violation. While Rule 508 of Regulation D provides that insignificant deviations from the exemption's terms do not result in loss of the exemption, the SEC is likely to view violations involving unregistered broker-dealers as significant because they implicate investor protection.[^23]

Second, if the finder solicited investors with whom neither the finder nor the issuer had a pre-existing substantive relationship, those solicitations may constitute general solicitation under Rule 502(c), which is prohibited in Rule 506(b) offerings.[^24] If general solicitation is found, the offering no longer qualifies under Rule 506(b), potentially triggering rescission rights for every investor in the offering, not just the investor introduced by the finder.

D. Unenforceability of the Finder's Agreement

Section 29(b) cuts both ways. The finder's engagement agreement may itself be void as a contract whose performance required a violation of the broker-dealer registration provisions. Courts have held that the finder cannot recover compensation under unjust enrichment or quantum meruit theories either, reasoning that permitting equitable recovery would render the registration requirements a "toothless tiger."[^25] The practical consequence is that the company loses the ability to enforce the agreement's protective provisions, including confidentiality, non-solicitation, and intellectual property assignment, but only after the arrangement has already created the rescission and enforcement exposure described above.

E. Downstream Diligence Complications

Even where rescission is never formally asserted, an improperly structured finder arrangement creates friction in subsequent financing rounds, M&A transactions, or IPO preparation. Sophisticated investors and their counsel routinely review prior capital-raising activity as part of standard diligence. A finding that the company used an unregistered broker may result in requests for enhanced representations and indemnities, price adjustments, or a decision not to proceed.

F. A Note on Enforcement Probability

Standalone finder fee violations are not the SEC's primary enforcement focus. They more commonly arise as add-on claims in broader securities fraud or unregistered offering actions, or when an investor complaint triggers examination.[^26] But the fact that standalone enforcement is infrequent reflects prioritization, not a safe harbor. The rescission risk, diligence complications, and aiding-and-abetting exposure exist regardless of whether the SEC brings a standalone action. And when these issues do surface, they tend to materialize exactly when the company can least afford them.

III. How to Structure It Right

There are several ways to compensate someone for an investor introduction while managing the risks described above. The right approach depends on the facts, particularly the nature of the person's relationship with the company and whether they bring value beyond a single introduction.

A. Transaction-Based Compensation (Not Recommended)

Paying a fee or equity grant contingent on the investment closing is the arrangement most likely to be deemed unregistered broker activity. This is the structure the SEC targets most aggressively and the one that provides the strongest basis for investor rescission. It should not be used unless the finder is a registered broker-dealer.

B. Non-Contingent Flat Fee for the Introduction (Risky)

Rather than tying compensation to the investment closing, the company pays a flat fee (in cash or a fixed equity grant) for the introduction itself, payable regardless of whether the investment is consummated. This removes the strongest indicator of broker activity. To be defensible, the fee should be clearly for the introduction, not scaled to the size of the investment. The finder's involvement must end at the introduction: no participation in negotiations, no discussion of deal terms or valuation with the investor, no handling of funds or documents. The arrangement should be documented in writing before the introduction is made. And the finder should not be someone who regularly facilitates investor introductions for compensation across multiple companies; a pattern of such activity significantly increases the risk regardless of how any individual deal is structured.[^27]

Even with these safeguards, residual risk remains. If the finder's only connection to the company is the introduction, a regulator could view the arrangement as broker activity in non-contingent clothing. That said, there is no published SEC enforcement action involving a non-contingent flat fee paid for a single investor introduction in a seed-stage private placement.[^28] The risk is low on a one-off basis in this context, but it is not zero.

C. Genuine Advisory Relationship (Recommended Where Facts Support It)

If the individual brings real value beyond the investor introduction, such as industry expertise, customer or partner relationships, operational experience, or a relevant professional network, the company can retain the individual as a strategic advisor under a standard advisory agreement, with equity compensation that vests over time based on continued service.

This is the strongest structure where the facts support it. The advisory agreement establishes a genuine consulting relationship with a defined scope of services. Equity compensation is issued under a separate restricted stock award agreement with time-based vesting, forfeiture on termination, and standard protective provisions. The equity is anchored to the advisory relationship, not to any particular transaction. The investor introduction occurs organically within the broader advisory engagement, but compensation is not sized, structured, or timed around the investment.

Several conditions are critical. First, the scope of services must have genuine substance. If the only thing the advisor contributes is a single investor introduction, no amount of drafting transforms the arrangement into something other than what it is. Second, the equity package should be consistent with what the company offers other advisors of comparable stature; a materially larger grant creates an inference that the excess compensation is for the introduction. Third, the advisor's involvement with the investor must end at the introduction. Fourth, the advisory relationship and its scope should extend well beyond any single introduction.

D. Registered Broker-Dealer (Recommended for Larger Deals)

Engaging a registered broker-dealer as a placement agent eliminates the unregistered broker risk entirely. The practical constraint is economics: placement agents typically charge 6-10% of capital raised, and most will not take on engagements below $1-2 million. For early-stage companies raising smaller amounts, this is often impractical. But it remains the cleanest path for companies that can afford it.

E. A Note on the M&A Broker Exemption

The Consolidated Appropriations Act of 2023 codified a federal exemption for "M&A Brokers" engaged in facilitating the transfer of ownership and control of privately held companies.[^29] This exemption has specific conditions (the buyer must acquire control and actively operate the business, no shell companies, no public offerings, among others) and is limited to M&A transactions. It does not apply to capital-raising transactions and is not a substitute for the finders exemption that does not yet exist. It also does not preempt state law. Companies exploring a sale or merger should be aware of this exemption, but it is not relevant to the typical investor-introduction scenario.

IV. The Road Ahead

The regulatory landscape may be shifting. The current SEC leadership has signaled clear interest in formalizing a finders exemption, and the July 2025 Small Business Capital Formation Advisory Committee conference suggests that rulemaking or an exemptive order may be forthcoming.[^30] If adopted, such relief would likely build on the 2020 proposed framework, potentially with expanded scope for offerings under $5 million.

But until the SEC formally acts, companies and finders should expect the Commission to continue enforcing its historical position that transaction-based compensation for investor introductions constitutes broker activity requiring registration. Structuring these arrangements carefully is not optional. It is the only way to protect both the company and the capital it has raised.

VMG Business Advisory can assist with structuring advisor and consultant arrangements, equity compensation, and fundraising compliance to help founders navigate these issues before they become problems.

This article is provided for general informational and educational purposes only. It does not constitute legal advice, and the analysis is based on federal law as of April 2026. State broker-dealer and agent registration requirements vary by jurisdiction and may impose additional obligations. Before structuring any compensation arrangement in connection with a capital raise, you should consult with qualified legal counsel who can evaluate your specific situation.

Related practice areas: Private Placements & Securities · Start-Up Counseling · Entity Formation & Corporate Governance

[^1]: 15 U.S.C. § 78o(a)(1).

[^2]: 15 U.S.C. § 78c(a)(4)(A).

[^3]: See United States SEC v. Hui Feng, 935 F.3d 721, 728 (9th Cir. 2019) (applying totality-of-the-circumstances analysis and holding that the Exchange Act does not exempt brokers based on the volume of transactions absent a specific statutory exemption); SEC v. Kenton Capital, Ltd., 69 F. Supp. 2d 1, 12 (D.D.C. 1998) (identifying "regularity of participation" as a primary indicium of being "engaged in the business"); SEC v. Martino, 255 F. Supp. 2d 268, 283 (S.D.N.Y. 2003) (applying multi-factor test without requiring a minimum number of transactions).

[^4]: See SEC Release No. 34-90112 (Oct. 7, 2020) (proposed exemptive order for finders); Cornhusker Energy Lexington, LLC v. Prospect St. Ventures, No. 8:04CV586, 2006 U.S. Dist. LEXIS 68959, at *19 (D. Neb. Sept. 12, 2006); Prince Lobel Tye LLP, Client Alert: Finding Investors—Are Finders Legal? (May 11, 2022) (listing fifteen factors indicating broker activity requiring registration).

[^5]: SEC v. Kramer, 778 F. Supp. 2d 1320 (M.D. Fla. 2011).

[^6]: See United States SEC v. Murphy, 50 F.4th 832, 840 (9th Cir. 2022) (noting that transaction-based compensation is a "strong indicator" of broker activity but "does not alone establish broker status"); Hui Feng, 935 F.3d at 728-29 (considering transaction-based compensation alongside other indicia including active solicitation and negotiation).

[^7]: See Prince Lobel Tye LLP, Client Alert: Finding Investors—Are Finders Legal? (May 11, 2022) (listing four factors typical of intermediaries who would probably not be required to register).

[^8]: See id. ("[T]he SEC took the position that a person who accepts a flat fee more than once is nonetheless required to register as a broker-dealer.").

[^9]: 17 C.F.R. § 240.3a4-1. The rule requires that the associated person: (1) is not subject to statutory disqualification; (2) is not compensated by commissions or other remuneration based directly or indirectly on securities transactions; (3) is not an associated person of a broker or dealer; and (4) limits sales activities to one of three specified categories. See also SEC, Guide to Broker-Dealer Registration (noting that the "so-called issuer's exemption does not apply to the personnel of a company who routinely engage in the business of effecting securities transactions").

[^10]: Paul Anka, SEC Staff No-Action Letter (July 24, 1991).

[^11]: See David W. Blass, Chief Counsel, Division of Trading and Markets, SEC, Remarks to American Bar Association, Trading and Markets Subcommittee (Apr. 5, 2013) (stating that the SEC staff would not provide no-action relief under a comparable fact pattern today).

[^12]: SEC Release No. 34-90112 (Oct. 7, 2020). The Tier I/Tier II framework and the specific permitted and prohibited activities are detailed in the SEC's Office of the Advocate for Small Business Capital Formation, Summary of Proposed Exemptive Order (2020).

[^13]: See SEC Chairman Paul S. Atkins, Remarks at the Small Business Capital Formation Advisory Committee Meeting (July 22, 2025); Commissioner Hester M. Peirce, Finders/Seekers: Exemption Features, Remarks at SBCFAC Meeting (July 22, 2025).

[^14]: Peirce, supra note 13.

[^15]: 15 U.S.C. § 78cc(b).

[^16]: See Xeriant, Inc. v. Auctus Fund LLC, 141 F.4th 405, 411 (2d Cir. 2025) (affirming that Section 29(b) provides a private right of action for rescission of contracts whose performance involves a violation of the Exchange Act); Regional Properties, Inc. v. Financial & Real Estate Consulting Co., 678 F.2d 552, 558-59 (5th Cir. 1982) (voiding agreements with unregistered broker-dealer under Section 29(b)).

[^17]: Regional Properties, 678 F.2d at 559.

[^18]: See id. at 560-61 (holding that rescission is an equitable remedy permitting recovery of sums paid under the contract); see also Regional Properties, Inc. v. Financial & Real Estate Consulting Co., 752 F.2d 178, 182-83 (5th Cir. 1985) (on remand, discussing scope of equitable remedy).

[^19]: 15 U.S.C. § 78cc(b).

[^20]: 15 U.S.C. § 78t(e).

[^21]: In re William M. Stephens, SEC Release No. 34-69090, Admin. Proc. File No. 3-15233 (Mar. 11, 2013); In re Ranieri Partners LLC and Donald W. Phillips, SEC Release No. 34-69091, Admin. Proc. File No. 3-15234 (Mar. 11, 2013). The respondents settled without admitting or denying the findings, consistent with the SEC's standard settlement practice. See 17 C.F.R. § 202.5(e).

[^22]: See In re Paul John McCabe, Jr. and PMAC Consulting, LLC, SEC Release No. 34-102230, Admin. Proc. File No. 3-22431 (Jan. 17, 2025) (settlement for unregistered broker-dealer activity); In re Sean McManus, SEC Release No. 34-100171, Admin. Proc. File No. 3-21940 (May 17, 2024) (barred from association for soliciting investments and receiving transaction-based compensation as unregistered broker).

[^23]: See 15 U.S.C. § 78cc(b); see also 17 C.F.R. § 230.508 (insignificant deviations from Regulation D terms do not result in loss of exemption, but only where the failure does not pertain to a term or condition directly intended to protect the investor). The SEC has not issued guidance directly addressing whether use of an unregistered broker-dealer constitutes a "significant" deviation for Rule 508 purposes, but enforcement practice suggests it would be treated as such given the investor-protection rationale underlying broker-dealer registration. See Anstalt v. Oxysure Sys., 216 F. Supp. 3d 403, 410 (S.D.N.Y. 2016) (noting that contracts involving unregistered broker-dealers may be voidable under Section 29(b)).

[^24]: See SEC v. Mattera, No. 11-cv-8323, 2013 U.S. Dist. LEXIS 174163, at *28-30 (S.D.N.Y. Dec. 6, 2013) (solicitation by agent without pre-existing substantive relationship with offerees results in loss of Regulation D exemption); SEC v. Levin, 849 F.3d 995, 1002 (11th Cir. 2017) (compliance with Rule 502(c) is critical to maintaining Rule 506(b) exemption).

[^25]: See Regional Properties, 678 F.2d at 564 (denying unregistered broker recovery under equitable theories, reasoning that permitting such recovery would render registration requirements a "toothless tiger"); Lawrence v. Richman Group of Conn., LLC, 407 F. Supp. 2d 385, 392-93 (D. Conn. 2005) (applying Regional Properties to deny unjust enrichment claim by unregistered broker); see also 15 U.S.C. § 78cc(b).

[^26]: See Startup GC, Finders Fees and the Securities Laws ("Pursuing actions based solely on finders fee violations does not seem to be an enforcement priority for either state or federal regulators.").

[^27]: See Paul Anka, SEC Staff No-Action Letter, supra note 10 (relief predicated on the finder's pre-existing relationships with investors and absence of any involvement beyond providing contact information).

[^28]: Based on a review of SEC enforcement actions and published no-action letters through early 2026, no published action involves enforcement against an unregistered finder who received a non-contingent flat fee for a single introduction in a seed-stage context. Cf. SEC v. Kramer, 778 F. Supp. 2d 1320 (M.D. Fla. 2011) (finding no broker-dealer violation where finder's activities were limited to introducing acquaintances and discussing the company in general terms, without negotiating transactions or effecting investments, notwithstanding receipt of transaction-based compensation). The SEC has not adopted the Kramer court's reasoning and continues to treat transaction-based compensation as a primary enforcement trigger.

[^29]: Consolidated Appropriations Act, 2023, Pub. L. No. 117-328, § 4(a) (codifying the M&A broker exemption at Exchange Act § 15(b)(13)); see also SEC M&A Brokers No-Action Letter (Jan. 31, 2014).

[^30]: See Atkins and Peirce, supra notes 13-14; Prince Lobel Tye LLP, The SEC Will Soon Clarify Finder Law—Reading the Tea Leaves (Aug. 28, 2025) (predicting that "the 2025 derivative will very likely be an enhanced version of the 2020 Proposal").