Using Money Finders to Raise Capital From Accredited Investors

Money finders (capital raisers) can help you raise capital. You’ll hear about other real estate syndicators using them at seminars, monthly meetings, and in online discussions.

But should you use a money finder?

There are plenty of people willing to help you raise capital for a fee. Often this compensation is in the form of cash or equity in the syndication.

The use of money finders is a thriving market and can feature a motley cast of characters starting with your Uncle Stan all the way up to sophisticated organizations operating in the gray. They’re all offering to help you raise capital by introducing you to investors and of course, none of them are doing it for free. 

On one end of the spectrum are finders that are essentially lead generators who provide you with prospective investor leads for a fee regardless of whether you’re successful at converting these leads into investment capital or not. 

It’s the other class of finders on the other end of the spectrum that you need to be careful of – the ones that want a piece of the pie. It’s these types of finders whose compensation is transaction-based that you need to be leary of.

Why? Because this type of activity is regulated by the SEC and requires licensing and most of these black market money finders are not licensed.

Securities laws and regulations distinguish between two types of activities:

(1) Finder Activity

(2) Broker/Dealer Activity

One is regulated, and the other is not. A true “finder” is one who passes on the leads to the company and usually gets paid on a per lead basis, or you compensate them for contacting your entire database for a flat fee. Their compensation begins and ends with the handoff to the company (without regard to whether the prospective investor actually invests in the company). They have no further motivation to stay connected to the lead since there would be no additional compensation from the conversion of the lead into an investor providing investment capital.

Broker/dealer activity, on the other hand, is more involved because compensation is transaction-based. These type of finders are interested in keeping in the loop to see the investment come to fruition.

Broker activities can include bringing their friends and family members to invest or recommending the purchase of securities, negotiating the terms of the offering, dishing out advice, valuing the securities, including their branding on the documents, handling funds, or even simply making an introduction. A simple introduction seems harmless, but when the money finder is compensated only if the person becomes an investor, it becomes a regulated activity.

The SEC is more interested in this type of activity because these brokers take on more of a trusted and fiduciary role, the violation of which could result in financial loss. Of course, to act as a broker, the person (or his/her firm) must be licensed by FINRA and must register with the SEC as a broker/dealer.

This is why you need to avoid the black market investor finders. Many of them are not in it for a flat fee. Most want a piece of the pie.

The problem? Most are not licensed broker/dealers.

They’re operating on the fringes hoping an issue never comes up and rolling the dice on not getting caught. Some money finders are thinking that maybe they can avoid licensing if they don’t go beyond the introduction stage.

After all, they’re not involved in the most critical stages of the investment process, including due diligence, deal analysis, and document review. But, here’s the problem… when deciding whether a party is acting as a broker/dealer, the number one factor taken into consideration is how these finders are compensated.

Historically, the SEC has taken the position that compensation (cash/equity/etc.), which is contingent on the amount of the sale or investment and determined as a percentage of the capital raised, is a strong indicator that the finder is acting as a broker/dealer and therefore licensure and registration are required.

This all seems like concerns on the side of the finders, no? As a company, can’t you just turn a blind eye to their activity? After all, you surely can’t be expected to regulate the actions of others.

Well, here’s the kicker… raising money through unlicensed brokers is not just a money finder problem, but also a company problem.

Engaging as an unlicensed broker/dealer can result in serious consequences for the individual, including civil and criminal penalties and liability. Those companies thinking this is only a “finder’s” problem will be sorely mistaken.

In fact, it can result in significant consequences for the company (and, therefore, it’s officers and directors), including civil and criminal liability and penalties. In addition, the re-characterization of the relationship from “finder” to “broker” can likely cause the company and its officers and directors to be in violation of state and federal securities laws and void whatever exemption from registration they were hoping to rely on. As a result of such violations, investors in these offerings may have a right to get their money back (with interest) and rescind the investment.

Syndicators and companies seeking private capital just know…

Money finders may offer an easy path to capital, but they may also drag you down a path to civil or criminal prosecution. That’s why it’s vital to question the motives and qualifications of money/investor finders upfront and how they expect to be compensated.

Matt Scott
Matt Scott
Matt Scott is a seasoned expert in the private capital markets, specializing in raising funds from accredited investors. With over two decades of experience in starting, capitalizing, operating, and exiting private companies, he guides entrepreneurs through the intricate landscape of private capital raising. Leveraging proprietary processes and systems, Matt and his team have successfully facilitated over $1 billion in capital raises for their clients. At 7x, Matt and his team provide comprehensive execution and back-office support, tailoring strategic systems to meet the unique needs of each entrepreneur on their journey to secure private capital. Their client base spans the United States, Canada, Dubai, Israel, Finland, and Central America, underscoring their global reach and expertise.