Key Takeaways
- A finder's fee is a payment to someone who introduces investors; when it is a percentage of capital raised, US regulators generally treat the finder as an unregistered broker
- Exchange Act Section 15(a) makes it unlawful to act as a broker without SEC registration, and selling a Reg D private placement does not exempt the seller from that requirement
- Transaction-based compensation (a cut of the round, success fees, equity that vests on closing) is the single strongest signal of broker activity in the SEC's own guidance
- Exchange Act Section 29(b) makes contracts made in violation of the Act voidable, which can expose the finder agreement and, in some cases, the investors' purchases
- California Corporations Code 25206.1 creates a narrow state finder exemption: natural persons, accredited investors only, offerings up to $15 million, no negotiating and no advice
- The SEC proposed a federal finder exemption in October 2020, but it was never adopted, so there is still no federal safe harbor for paid finders
- The cleanest path is to run outreach yourself under the issuer's exemption, or pay a registered broker-dealer you have checked on FINRA BrokerCheck
Usually not, if the fee depends on how much money they bring in. A US finder paid a percentage of capital raised is generally acting as a broker, and brokers must register with the SEC under Exchange Act Section 15(a). Paying an unregistered finder can make the deal voidable. Use a registered broker-dealer, a flat fee for non-sales work, or raise it yourself.
This guide is general information, not legal advice. Broker status turns on specific facts, and state law adds its own layer. Confirm your structure with securities counsel before you sign anything that pays for introductions.
What is a finder's fee in startup fundraising?
A finder's fee is compensation paid to a person who introduces a company to investors, most often a percentage of the money those investors put in.
The typical offer looks harmless. A consultant, a former banker, or a well-connected angel says they can bring in capital and asks for a few percent of whatever closes, sometimes plus warrants or advisor shares. Founders accept because it feels like paying only for results.
That is exactly the problem. Paying only for results is what makes the arrangement look like brokerage. The SEC's Guide to Broker-Dealer Registration lists "finders" who find investors for issuers, including in venture capital or angel financings and "even in a consultant capacity", among the people who may need to register as brokers.
The label in the contract does not matter. Calling someone an advisor, a consultant, or a strategic partner does not change the analysis if what they do and how they are paid is broker activity.
Why does paying a percentage of the raise create legal risk?
Because transaction-based compensation is the clearest marker of being "in the business" of effecting securities transactions, and that business requires registration.
Section 15(a) of the Securities Exchange Act makes it unlawful for a broker to induce or attempt to induce the purchase or sale of a security without being registered. The SEC's registration guide gives four test questions. A yes to any of them suggests broker status:
A percentage-of-raise finder answers yes to the compensation question by design. Most also solicit, which answers yes to the first.
The SEC guide is explicit on a point many founders miss: a security sold in a transaction exempt under Regulation D is not an "exempted security" for broker purposes. A person who sells Reg D securities must still register. Placement agents are not exempt.
What happens if you pay an unregistered finder?
The risk falls on the company as well as the finder: contracts can become voidable, investors can claim rescission, and the round can be harder to diligence later.
The exposures stack up:
None of this requires bad faith. Most problematic finder deals are signed by founders who never heard of Section 15(a).
Is there a legal way to pay someone for introductions?
Yes, but each option comes with conditions, and none of them is "a percentage to anyone who sends a name".
Here are the main structures, compared on the criteria that matter:
Two checks apply to every option. First, confirm registration on FINRA BrokerCheck for anyone who claims to be a registered representative; the SEC's investor glossary explains what that registration means. Second, put the fee structure in writing and have counsel review it before the first introduction, not after the money arrives.
What does the California finder exemption allow?
California lets a registered "finder" take compensation for introducing accredited investors, as long as they do nothing beyond the introduction.
California Corporations Code Section 25206.1 defines a finder as a natural person who introduces accredited investors to an issuer, or an issuer to accredited investors. To qualify, the finder must not:
The finder must also file a statement of information with the California regulator, pay a $300 filing fee, and meet the section's other conditions before making introductions.
This is a state exemption only. It does not resolve federal broker status under Section 15(a), and it does not cover introductions to investors in other states. Treat it as a narrow lane, not a general permission slip.
Did the SEC create a federal finder exemption?
No. The SEC proposed one in 2020, but there is still no adopted federal rule letting unregistered finders take success fees.
In October 2020 the SEC proposed a conditional exemption for finders who help small businesses raise capital from accredited investors. It would have created two tiers: Tier I finders who only pass along contact information, and Tier II finders who could solicit investors on the issuer's behalf under disclosure conditions.
The proposal was never finalized. Until a rule is adopted, the federal answer is the one in the broker-dealer registration guide: a person paid on the outcome of a securities sale is presumed to need registration. Do not rely on articles from late 2020 that describe the proposal as if it were law.
How can founders raise without a broker at all?
By doing the selling themselves. A company selling its own securities through its founders and officers generally does not need a broker, provided the people selling meet the issuer's exemption.
Exchange Act Rule 3a4-1 says an associated person of an issuer is not a broker solely because they help sell the issuer's securities, if they:
That describes most startup CEOs. The work then becomes operational: building a list, reaching people, and following up. Y Combinator's guide to seed fundraising treats it as the founder's job for the same reason.
Practical steps for a founder-run raise:
How do you vet someone who offers to raise money for you?
Ask four questions before you take a single introduction, and walk away from anyone who cannot answer them cleanly.
A legitimate placement agent will welcome these questions. A finder who calls them overcautious is telling you something.
Run your raise yourself, with better targeting
GIGABOOST matches you against 340,000+ verified investors scored on 15 dimensions of fit, then runs LinkedIn and email outreach from your own accounts. Flat pricing, never a percentage of what you raise: Growth is $499/mo.Frequently Asked Questions
Can I pay a friend a percentage for introducing an investor?
Generally not, unless that friend is a registered broker or qualifies for a specific state exemption. A percentage of the investment is transaction-based compensation, which the SEC treats as a strong sign of broker activity. A one-time thank-you does not change the analysis if the payment is tied to the investment closing.
Is it illegal to accept introductions from an unpaid friend?
No. Broker regulation turns largely on being paid for, and being in the business of, effecting securities transactions. A friend who makes an unpaid introduction and stays out of negotiations is not acting as a broker. Keep it that way by not promising anything contingent on the investment.
Can I give a finder advisor shares instead of cash?
Equity that is granted or vests because a financing closes is still transaction-based compensation. Advisor shares for genuine ongoing advisory work, vesting on time served, are a different arrangement. The question is whether the payment depends on capital being raised, not what form it takes.
What is the difference between a finder and a placement agent?
A placement agent is a registered broker-dealer, or a registered representative of one, that is legally allowed to solicit investors and take a success fee. A finder is usually an unregistered individual doing the same introductions without that registration. The work can look identical; the registration is what makes the fee lawful.
Does a flat-fee fundraising consultant need to be registered?
A flat fee for non-sales work, such as editing a deck or building a financial model, carries much less risk than a success fee. If the consultant also solicits investors or negotiates terms, a flat fee does not by itself remove broker concerns. Define the scope of work in writing and keep solicitation with the founders.
Do these rules apply outside the United States?
Section 15(a) and Rule 3a4-1 are US federal rules, and California 25206.1 is a California rule. Other markets have their own regimes for arranging investments, such as the FCA in the UK and the DFSA in the DIFC. If you raise from US investors as a non-US company, US rules can still apply to that outreach.