SEC Signals Zero Tolerance for Unregistered Broker Activity
In a string of January 2025 settlements, the Commission reaffirmed that transaction-based compensation remains the defining hallmark of broker-dealer status under Section 15(a) of the Securities Exchange Act of 1934 (“Exchange Act”). Individuals and firms operating as “finders” in private placements, often under the mistaken belief that they fall into a regulatory gray zone, are finding themselves squarely within the SEC’s enforcement crosshairs.
Companies Seeking Capital—Be Wary of “Consultants” and “Finders”
For smaller companies and startups seeking to raise capital, encountering consultants or “finders” who promise to connect them with potential investors is common. While these individuals may offer valuable introductions, companies must carefully consider the legal framework surrounding these services. Engaging unregistered individuals in capital-raising activities can lead to regulatory and legal consequences that can jeopardize the success of the funding round and the company’s future growth. However, a legally compliant path exists for certain “finders” to operate without triggering registration as a broker-dealer.
Broker-Dealers vs. Unregistered Finders in Capital Raising
Determining whether an intermediary operates as a finder or an unregistered broker-dealer is a nuanced and fact-specific inquiry that can present significant challenges. For unwary entrepreneurs, corporate executives, and equity fund sponsors, the stakes are high; engaging a third party that inadvertently crosses the line into broker-dealer territory can result in serious regulatory repercussions.