Wondering if you can pay someone to raise money for you? Understanding the legalities of hiring a professional fundraiser is crucial to ensure compliance with crowdfunding and securities laws. This article breaks down the rules, risks, and best practices to help you navigate fundraising legally and effectively. Read on to learn how to raise funds while staying on the right side of the law!
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Can You Pay Someone to Raise Money for You?
This question has come up quite a bit recently. In fact, the question has been so popular that Gene and Jillian recently did a video on Facebook discussing this issue.
To watch the video, click here: https://www.facebook.com/crowdfundinglawyers/videos/655962644830609/?notif_id=1561061673402515¬if_t=mention
The short answer to the question (and really to most legal questions) is: yes, but it depends.
What Can You NOT Do?
To start, the law regarding whether you can pay someone to raise money for you (i.e., paying people to sell securities) states that anyone in the business of raising money for others and receiving transaction-based compensation is considered a “broker-dealer” and must be appropriately licensed.
If someone offers to help you raise money in exchange for a commission but they do NOT have a broker-dealer license, that is a huge NO-NO and can lead to liability not just for the unlicensed broker-dealer but for you as the issuer as well. In addition to charging the broker-dealer with selling securities without a license, the SEC has the power to force the issuer to offer a rescission (basically a complete refund) to ALL its investors at any time.
Here are just a few recent examples of the SEC going after unlicensed broker-dealers AND the issuer:
Bottom line: Do NOT pay someone a commission to sell your securities unless they are a licensed broker-dealer.
What About Finders Fees or Consulting Fees?
The law prohibits “transaction-based” compensation, so you might be thinking (and we’ve gotten quite a few people reaching out to us asking), what if I just don’t pay someone a commission but a finders/referral/consulting fee? Well, just because you don’t call it a commission doesn’t mean the SEC won’t see it as transaction-based compensation. Hopefully, you read some of the linked articles above and saw that the SEC actually went after unlicensed brokers who got paid some sort of flat fee.
The issue boils down to what the person was actually doing to help you raise money. If they are just making an introduction in exchange for a small flat fee, then that will probably be okay—provided that all they did was introduce you to the potential investor. However, if the person is making certain representations to investors on your behalf to try to convince them to invest, that sounds more like brokering services.
It’s the same for consulting services as well. The central question is whether the person was really providing consultation for the issuer or if they just called it that to get around being an unlicensed broker-dealer. The SEC is not stupid. If you pay someone for unlicensed broker-dealer services but just call it something else, they’ll know, so just don’t do it.
So What Can You Do?
You can’t pay someone to raise money for you without a license, but you don’t need a license yourself to sell your own securities. This is called the issuer exemption. Who counts as the “issuer,” though? Well, if you’re doing a syndication, you’re probably selling investment interests in some entity, usually an LLC. The “issuer” in that case would be the LLC. Any controlling members of the LLC could sell securities on behalf of the LLC without a broker-dealer license under the issuer exemption. That means you could potentially offer people equity in the company in exchange for raising money for the offering.
Be careful, though. By giving out equity, you could be opening the door for more liability. For example, anyone involved in money-raising is subject to certain bad actor disqualifications. The burden is on the issuer to make sure all parties involved in money-raising have not engaged in certain bad acts. If you take on an equity partner who failed to disclose a bad act (or maybe even lied about it), that could blow your entire offering—again leading to SEC action, criminal prosecution, rescission, etc.
In Conclusion
The best policy to have is simply not to pay someone to raise money for you. It’s just not worth the risk.
If you have more questions about this topic and syndications in general, feel free to schedule a free 15-minute consultation with one of our attorneys here: https://go.oncehub.com/TrowbridgeSidotiLLP