Looking For Investors? What You Need to Know About Broker-Dealers

Chances are, if you’re reading this, you are seeking investors to help fund your business. That’s great! Investors can be saviors to struggling small businesses and start-ups, so we can understand that you’d want as much help as possible in getting them through the door. Before you start though, let’s discuss what a broker-dealer is and why it is extremely important for you to know what a broker-dealer is.



It’s totally understandable that you’d want an extra hand or two in helping find investors. We get it, just make sure you do not compensate your finder for this help. Just don’t do it. Once more, with feeling: DO NOT PAY FINDERS.


Broker-Dealers v. Finders

Let’s start with a hypothetical example:

Your buddy Bob Dylan says, “hey, I know lots of rich and well connected people. I’ll find you investors, just give me a commission / cut for bringing in investment dollars!” You agree (because it sounds like a fantastic idea) not to pay Bob up front and he’ll deliver a long line of investors who will fund your business. Easy peasy lemon squeezy, right? Not so fast.

Bob would likely be acting in the capacity of a broker-dealer (see what we did there with the ‘b’ and ‘d’ initials?) in this example and unless he’s registered as a broker-dealer with the Securities Exchange Commission (AKA the SEC), you’re cruising for trouble. Why? Well, let’s discuss what makes ol’ Bobby Boy a broker-dealer first.

Anytime someone does the following on your behalf, they are likely a broker-dealer:

  • Finds and introduces you to potential investors;
  • Participates in discussions and negotiations between you and the potential investors;
  • Assists in structuring the investments;
  • Receives transaction-based compensation, i.e., a commission or some form of compensation that varies with the size or type of the resulting investment.

There are other factors, but these are the important ones. Now, let’s talk about what a “finder” is, shall we? A finder typically:

  • Finds and introduces you to potential investors;
  • Participates in discussions and negotiations between you and the potential investors; and
  • Assists in structuring the investments.

As you can see, the finder does not receive compensation based on the assistance they provide in finding investors for your business. Simply put, a finder (not compensated) is okay, unlicensed broker-dealers (compensated) are not.


So Why Do We Care About Broker/Dealers?

Because they’re people, damn it! But also because the Securities and Exchange Commission (SEC) cares. Broker-dealers must register with the SEC and the registration process is no joke (including very high fees, regulatory exams, federal and state compliance and fees, etc.).

But why do you care about Bob’s registration, after all, he doesn’t work for you? If an unregistered broker-dealer is discovered by the SEC or other governing body, not only can significant financial penalties be levied, but your investors may have the right to rescind their investment. That’s right, if you work with an unregistered broker-dealer and bring in $5 million in funding, that funding could vanish into thin air (and give you a really bad reputation in the investment community).


How to Avoid Unlicensed Broker-Dealer Issues

Our goal with this is not to scare you, but it’s highly necessary to lay all of this out because of the  frequency in which we see good, honest people unwittingly working with unregistered broker-dealers.  In fact, the broker-dealers themselves don’t typically realize that what they are doing isn’t permitted. That said, let’s give you some general guidelines on how to avoid the unregistered broker-dealer situation:

  1. You can absolutely be introduced to investors by someone (But, don’t pay them to do so).
  2. You can absolutely have someone out there actively looking for investors on your behalf (But, don’t pay them to do so).
  3. You can even have someone out there introducing you to investors and participating in the negotiations (But, don’t pay them to do so).
  4. DON’T EVER PAY SOMEONE TO FIND YOU INVESTORS. Period. (Sorry for the aggressive caps, but we really needed to get that point across).

We understand that the industry doesn’t always take this information into account and people still pay unlicensed broker-dealers to find them investors. Time is money, we know! But you do not want to be the one of who gets in trouble with the SEC for this. It’s just not worth it in the long run.


Wrapping It All Up

While this is an oversimplification of some pretty complex SEC regulations, it’s nonetheless a helpful guide to the basics and we hope that it will help you avoid some unexpected minefields in your quest to raise those dolla dolla bills, y’all.

Updated 02/23/18

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