We get this question all the time, and our answer is always the same.
Only a licensed securities broker-dealer can raise money for a third party and earn a commission. As such, you cannot enter into an agreement to be an outside consultant or independent contractor to a Syndicate where it appears you are being paid a commission based on the amount of money you raise. That’s illegal unless you have a securities broker-dealer’s license, both for the Syndicator and for you.
You could be charged with acting as an unlicensed broker, which may be a felony and could make you responsible for the investments of the investors whom you refer. The Syndicator could lose their Securities exemption and be charged with selling unregistered securities through an unlicensed broker. You and the Syndicator could be potentially barred from raising money in the future. There are lots of people who have been prosecuted for such securities violations and lots of others who are barred from participating in Rule 506 securities offerings for these very reasons.
Further, the Regulation D, Rule 506 exemption from registration for a private securities offering applies only to the “Issuer” of the securities. The Issuer is the company that is selling securities to investors. The Issuer exemption allows Issuers to sell their own securities without a license.
To enjoy the benefits of the Issuer exemption, you must be an officer, director, member, manager, or an employee of the company that is issuing the securities. If you are an outside consultant, you are none of those things and thus, are not entitled to the Issuer exemption, again suggesting you are acting as an unlicensed securities broker.
The only defensible way for you to raise money for others without a license is to participate in the Syndicate in one of the roles described above and have a meaningful role in management other than raising money and that’s what you get compensated for—and your compensation cannot be related to the amount of money you raise.
If you are a Syndicator:
1. Don’t let others raise money for you unless they are part of your Syndicate and they have a meaningful role in management of your company other than just a voting right.
2. Don’t compensate them based on the amount of money they raise.
If you are raising money,
1. Do make sure you have a role in management other than raising money and make sure you actually perform that role.
2. Don’t sign a consulting agreement that makes you an independent contractor or consultant in exchange for raising money.
3. Don’t agree to compensation that pays you based on the amount of money you raise.
Relief in sight? There is proposed legislation to allow finders to receive fee-based compensation, but don’t hold your breath, as it’s been proposed before. Stay tuned and we’ll keep you posted if there are any new developments.
There is a chapter in my Amazon #1 best selling book “How to Legally Raise Private Money” that discusses this subject in further detail. You can obtain a FREE digital version by clicking here or you can buy a Kindle or paperback version on Amazon at the following link: https://amzn.to/2pHVWed.