A company that pays someone a percentage of the money they bring in, or a platform that matches investors with offerings, may be operating as a broker without knowing it. Section 15(a) of the Securities Exchange Act of 1934 makes it unlawful to effect securities transactions through interstate commerce without registering with the SEC, and registration brings FINRA membership, net capital rules, and ongoing supervision. We help founders, fund sponsors, and fintech companies figure out which side of the line they are on, structure their activities to stay there, and register when registration is the right answer.
When The Question Comes Up
Broker-dealer status usually surfaces at an inconvenient moment. A startup raising a seed round hears from a consultant who wants five percent of whatever he raises. A marketplace adds a feature that lets users buy fractional interests in assets. A software company builds order routing or a trading interface for a client. An investor's lawyer asks during diligence who was paid on the last round and how. Each of these situations raises the same underlying question, which is whether someone is being compensated for inducing or effecting securities transactions. If so and no one is registered, the problem reaches the company, the person who was paid, and sometimes the investors' rights in the deal itself.
Section 15 And The Broker Definition
Exchange Act Section 3(a)(4) defines a broker as anyone engaged in the business of effecting transactions in securities for the account of others, and Section 3(a)(5) covers dealers who buy and sell for their own account as a business. The SEC and courts weigh several factors, and transaction-based compensation tied to the size or success of a deal is the most important. Registration runs through Form BD and, under Section 15(b)(8), membership in FINRA, which brings the new member application, qualification exams, net capital and customer protection rules, and supervision requirements. Exemptions are narrow: Rule 3a4-1 for certain issuer employees, the M&A broker exemption in Section 15(b)(13), and limited foreign broker-dealer relief under Rule 15a-6.
The Finder Problem For Startups
No federal rule exempts finders. The SEC proposed a conditional finder exemption in 2020 and never adopted it, so an unregistered person who solicits investors and collects a success fee is taking a real risk, and so is the company paying that fee. Section 29(b) of the Exchange Act makes contracts made in violation of the Act voidable, which gives investors a potential rescission argument and leaves the finder's fee agreement itself on uncertain ground. We review finder and placement arrangements before they are signed, restructure payments where possible into fixed fees for services that do not involve selling, and point clients to registered placement agents when a real raise needs one.
Platforms, Fintech, And Registration
Technology companies run into broker-dealer questions through product design. Matching buyers and sellers, holding customer funds or securities, routing orders, recommending specific investments, and taking a cut of each trade are all activities the SEC associates with broker or exchange functions. We read the product the way an examiner would, looking at the user flows and the fee model as well as the terms of service. Depending on the facts, the answer may be to restructure, to partner with a registered broker-dealer, to register as a funding portal under Regulation Crowdfunding, or to register a broker-dealer and, if the platform matches orders, operate an alternative trading system under Regulation ATS. Digital-asset products get the same analysis, starting with whether the assets are securities.
Investigations And Enforcement Exposure
Unregistered broker activity is a recurring SEC enforcement theory, and state securities regulators bring their own cases under blue sky laws that require broker-dealer and agent registration. Exposure can include disgorgement of fees, civil penalties, industry bars, and private claims by investors who want their money back. When a client receives a subpoena, a FINRA inquiry, or a demand letter from an investor, we assess the facts quickly, preserve the documents that matter, and build the defense around how the activity was actually structured and paid. Where the problem is historical, we help companies decide whether to remediate, restructure, or disclose, and we work with our securities litigation practice when a dispute moves into court.
