It is common for real estate syndicators to want to compensate an individual who introduces investors to a deal, typically through a percentage-based fee tied to the amount invested — often in the range of one to two percent per transaction. Another common practice is giving the introducing party “co-GP” status in the deal; factoring in the amount of capital they brought to determine their percentage interests. While this practice is widespread across the industry, it frequently constitutes an unregistered broker-dealer violation under federal securities law, exposing both the individual receiving payment and the sponsor who authorized it.
What a Broker-Dealer Actually Is
Under Section 15(a) of the Securities Exchange Act of 1934 (“Section 15(a)”), any person in the business of effecting transactions in securities for the account of others must be registered as a broker-dealer with FINRA. The term "broker" is often associated with licensed financial professionals at established brokerage firms, but the statute does not require a license for you – or the capital raiser you paid – to fall within this definition. A license is required only to conduct such activity lawfully — its absence does not exempt the activity from being classified as broker activity; it simply makes such brokerage activities unlawful. The violation the capital raiser could be charged with is “acting as an unlicensed broker”. The violation the sponsor could be charged with is “paying an unlicensed broker.” Both are securities violations.
The Three Elements That Define Brokerage Activity
The SEC evaluates whether a given arrangement constitutes brokerage activity based on three factors, and where all three are present, the arrangement will typically be treated as such regardless of how the parties themselves characterize it.
The first factor is whether the individual is helping identify, introduce, or bring prospective investors to a potential transaction. The second is whether the individual receives transaction-based compensation — a percentage of capital raised, a flat fee per closed deal, or any compensation that factors in the amount their investors contributed to the deal. The third is whether this activity occurs with regularity, spanning multiple deals or investors as part of an ongoing arrangement, rather than as an isolated, one-time occurrence. Each factor is assessed independently, but it is the combination of all three that typically determines whether registration was required.
Why Relabeling the Arrangement Does Not Change the Analysis
The label attached to a compensation arrangement has no bearing on the underlying legal analysis. Terms such as "referral fee," "finder's fee," "consulting agreement," and "strategic partnership," “co-GP arrangement”, or “marketing fee”; are all treated equivalently under SEC scrutiny, which looks past terminology to the substance of what the individual is doing and how they are being paid for it.
Courts have addressed this issue repeatedly and have consistently held that an investor referral resulting in a securities transaction, where compensation is contingent on that transaction closing, constitutes brokerage activity – regardless of the label the parties assigned to it. Sponsors should not assume that structuring a payment as a "consulting fee" or "strategic partnership" compensation insulates the arrangement from this analysis.
Consequences of an Unregistered Broker Arrangement
The individual receiving transaction-based compensation faces potential registration requirements and personal liability under Section 15(a). However, the exposure to the issuer — the syndicator — is typically far more significant.
When a sponsor engages an unregistered broker to raise capital, investors obtained through that channel – and perhaps other investors in the deal – are entitled to rescind their investment. Rescission means the investor can demand a full return of their capital, without deduction, plus interest, at any time during the course of the deal, regardless of whether the underlying deal is performing well. The unlawful mechanism through which the investment was obtained is sufficient grounds for rescission on its own. Beyond investor rescission rights, the sponsor may face independent liability under the same statute for having used an unregistered broker to raise capital in the first place. In the context of any regulatory review or investor dispute, this history becomes part of the offering's compliance record — a defect that follows the deal and the sponsor's broader track record, not merely the single payment at issue.
Compliant Alternatives
Several structures exist that allow sponsors to compensate individuals who assist with capital raising without triggering broker-dealer registration requirements.
Where compensation is genuinely and directly tied to the amount of capital raised, the individual receiving that compensation must hold a FINRA-issued broker-dealer license. This remains the only fully compliant version of a transaction-based arrangement. By contrast, compensation for general marketing services, content creation, investor relations support, or other work that is not transaction-specific and not contingent on the closing of any particular investment generally falls outside the definition of brokerage activity, because the payment is tied to the service rendered rather than to the transaction itself.
Genuine co-sponsor or co-general partner arrangements represent a third path, provided the “co-GP” holds meaningful, ongoing operational responsibilities within the deal — asset management duties, investor reporting, or similar substantive functions. Simply assigning a co-GP title to an individual whose actual role remains investor solicitation, or investor relations for their own investors, does not resolve the underlying issue, since the SEC's analysis looks to the substance of the role rather than its label.
Addressing an Existing Arrangement
Sponsors currently operating under this type of arrangement should suspend any further payments immediately pending a review of the arrangement's structure, since continued payments represent an ongoing violation rather than a historical one. A qualified securities attorney can then evaluate the specific facts of the relationship, including how the individual is compensated, what functions they actually perform, how many investors have been introduced through them, and whether the arrangement has been ongoing across multiple deals or limited to a single instance.
Where the underlying business relationship is one the sponsor wishes to preserve, the appropriate resolution generally involves one of two paths: securing proper broker-dealer licensure for the individual, or restructuring their role entirely — commonly through a management or operational position with compensation that is no longer tied in any way to the amount of capital raised.
Conclusion
Sponsors seeking clarity on an existing capital raiser arrangement, or guidance on structuring a compliant alternative going forward, may schedule a consultation at syndicationattorneys.com/schedule to review the specific facts of their situation.
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