Paying a Finder’s Fee When Raising Capital in the United States: The Success Fee Trap

When raising capital in the United States, companies often run into a common, very avoidable legal problem: paying a “success fee,” “commission,” or “finder’s fee” to the person who introduced an investor.

It feels fair. Someone made a valuable connection, the company got money, and everyone wants to keep it simple.

Here is how this typically shows up in real life. A startup founder asks a friend to make investor introductions and promises 2% of whatever gets raised. The round closes. Six months later, during the next financing, a lead investor flags the arrangement in diligence and threatens to walk unless it is cleaned up. Deals have stalled for less.

The problem is that U.S. securities regulators do not view this as “simple.” If compensation is tied to the success of a securities transaction, it can trigger broker registration requirements and create real exposure for both the company and the finder. The damage often shows up later, during due diligence for the next financing or an acquisition, when someone asks: “Did you pay anyone transaction-based compensation to raise this money?”

Why paying a success-based fee to an unregistered finder is a problem?

U.S. securities law defines a “broker” as a person engaged in the business of effecting transactions in securities for the account of others.

Separately, the Exchange Act generally makes it unlawful for brokers to effect or induce securities transactions unless registered.

In plain English, if someone is acting like a broker, they often need to be registered. The SEC’s own guidance flags “finders” and similar intermediaries as activities that can require registration depending on the facts.

Why regulators focus on success fees

Transaction-based compensation is a major warning sign because it aligns the person’s incentive with closing securities transactions. Regulators frequently treat transaction-based compensation as a hallmark of broker activity, especially when paired with solicitation or investor contact.

Renaming the arrangement does not help. Calling it a “consulting agreement” or “finder’s fee” does not change how regulators analyze it. They focus on what the person is doing and how they are paid.

Who counts as a broker?

The statutory definition is broad. In practice, broker status is usually determined by a cluster of facts, including what the person actually does, how often they do it, and how they are compensated.

Common broker-activity signals

A finder is more likely to be treated as a broker if they:

• solicit investors or actively pitch the deal
• recommend the investment or negotiate terms
• have repeated involvement in capital raises
• participate in structuring the offering
• handle funds or investor paperwork
• get paid based on the amount raised or whether the raise closes (SEC)

Transaction-based compensation is not the only issue, but it is often the one that creates the clearest regulatory risk.

What can go wrong if you pay an unregistered broker?

The consequences tend to be practical, expensive, and poorly timed. Common fallout includes:

• rescission risk, meaning investors may claim a right to unwind the investment and demand repayment
• regulatory scrutiny, investigations, or enforcement exposure
• deal friction in the next round (or M&A) when diligence uncovers the payment and counterparties demand cleanup
• disputes over whether the finder agreement is enforceable, including fee clawbacks and litigation leverage shifts

Rescission risk is not theoretical. In practice it can operate like a “free look” for investors: if the company performs, they keep the upside; if things go sideways, some investors will look for a path to unwind the deal and demand their money back, and an unregistered finder payment can hand them leverage.

Also, do not ignore state “Blue Sky” laws. State regulators and state-law remedies can be as strict as, and sometimes stricter than, the federal framework. In some states, investors may also have comparatively straightforward state-law remedies.

Even if the raise “worked,” the structure can create a problem for the next transaction.

Can you pay a finder a flat fee instead?

Sometimes, but do not treat “flat fee” as a magic shield.

A flat fee not tied to the amount raised reduces risk, but it does not eliminate it if the person is still doing broker-like activities such as solicitation, negotiation, pitching, or regularly connecting issuers and investors.

Put differently, a $10,000 monthly retainer for someone who spends their time soliciting investors can still be problematic. Regulators look at the activity, not just the payment structure.

If someone is contacting investors, selling the deal, or participating in negotiations, you are in broker territory regardless of what the contract is called.

What about paying employees to help raise capital?

There is a limited safe harbor for certain associated persons of an issuer under SEC Rule 3a4-1.

The key idea is simple: an issuer’s own people can sometimes participate in fundraising without being treated as brokers, but only if they meet specific conditions, including limits on compensation.

Rule 3a4-1 generally requires that the person not be paid commissions or other transaction-based compensation tied directly or indirectly to securities transactions.

This safe harbor is narrow and easy to violate. If fundraising becomes someone’s primary job, or they are paid per investor or per dollar raised, or they act like a salesperson, the company can lose the safe harbor and recreate the same broker problem, just with an employee.

Is there a “Finder’s Exemption”?

In October 2020, the SEC proposed a conditional exemption framework for certain “finders” in private capital raising, often described as a Tier I and Tier II finder structure.

That proposal was never adopted.

Companies should not rely on a “finder exemption” unless counsel has confirmed a final rule, binding exemption, or other applicable guidance covers the specific facts.

How to avoid broker-compensation problems in your capital raise

Here is the practical approach we recommend companies follow before they pay anyone for investor introductions.

1. Use registered professionals when the activity looks like brokerage

If the person will solicit investors, pitch the deal, or negotiate terms, do it through a registered broker-dealer or placement agent.

2. Do not use transaction-based compensation with unregistered intermediaries

If you cannot clearly justify the arrangement without referencing “how much was raised,” you are likely creating risk.

3. Limit the role to true introductions, and document the boundaries

If you use a non-broker, keep the scope tight and written. No pitching, no negotiations, no investment advice, no marketing the deal.

4. Assume your next investor or buyer will diligence this

Draft the arrangement for the diligence file. If it looks like you hired an unregistered placement agent, it will come back to you at the worst time.

5. Get counsel involved before money changes hands

Fixing this after the fact is harder, more expensive, and sometimes impossible to unwind cleanly.

How We Can Help

Harris Sliwoski helps companies avoid broker-dealer problems before they become a diligence issue. That includes reviewing proposed finder arrangements, tightening compensation terms, and pressure-testing employee fundraising plans under Rule 3a4-1. If a prior raise already used a success fee, we can help assess exposure and map out practical cleanup steps before the next financing or sale.

If you are considering paying someone for investor introductions, or you already have, it is usually worth a quick review of the structure before it becomes a larger problem.

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