Paying Contingent Commissions Violate State and Federal Securities Laws

Paying Contingent Finders Fees Or Success
Fees For Investors In Your Startup Company Are Illegal

One of the biggest, and most dangerous, misconceptions by entrepreneurs and startup companies is that they can pay a contingent finder’s fee or success fee for raising their investor capital.

You need to know that you cannot pay contingent finders fees or success fees…to me or to just about anyone…for finding you investors for your startup company for your Reg D fundraising. This applies to both the old 506(b) and the new crowdfunding 506(c) Reg D offerings.

Paying contingent finder’s fees or success fees are violations of both state and federal securities laws – and both you and I could have a very serious problem with legal action, very hefty fines and penalties… And even jail.Avoid Jail With Funding Foreplay!

I don’t know about you but I don’t want to end up in Martha Stewart’s old jail cell that was her required residence as a result of her felony conviction!

Whether we work together or not, this is something you really need to know and understand to protect yourself: Contingent commissions, finder’s fees, success fees, or whatever you want to call them, can only be paid to NASD broker-dealer firms OR Registered Investment Advisors OR, in the case of a Title III offering, a funding portal that is registered with the SEC and a member of a registered self-regulatory organization (SRO). Currently that SRO is the Financial Industry Regulatory Authority (FINRA).

There is no federal securities law exception for 506 Reg D – even with the new equity crowdfunding offerings. Any payments of ANY contingent finders fees – besides those three exceptions – are a direct violation of both state and federal securities law. Period.

Hopefully, knowing this will help you from getting into very serious trouble with any of your current or future offerings.

Usually, neither the various state securities boards nor the SEC throw folks in prison for a first time violation (unless there is fraud involved.)

However, what does very often happen is that the company is forced to “rescind” its offering. This means the company has to give back 100% of all investments made by ALL investors – and sometimes even pay back interest on top of that. Sometimes, the penalties include that the executives of the company are even barred for life from ever raising investor funds again.

This rescission penalty gets to be a real, major problem – especially if the company has already spent some or all of the money!

Another kind of penalty that may be delayed a few years: You raise your money – with just a small amount being raised by paying contingent finders or success fees. You’re successful and you get ready for an IPO or to have your company acquired for a lot of money. Except…the required due diligence uncovers that you paid an illegal finder’s fee – and that kills the deal and you end up with a lot of unhappy  investors.

Bottom line: Do not pay any kind of contingent fundraising fees, commissions, success fees, etc. to anybody other than an NASD broker-dealer or a SEC Registered Investment Advisor or a funding portal that is registered with the SEC and a member of a registered self-regulatory organization (SRO).  Funding Foreplay - Don't Romance Investors Until After The Foreplay

Since it is illegal for me to accept, and for you to pay, a contingent payment, all of my work for my clients is at my standard billing rate strictly as a management consultant. As a way for both of us to be protected and to avoid any hint of contingent payment, I also require a 10 hour retainer at my standard billing rate of $175 per hour to commence working together.

This issue of contingent payments for fundraising is just one of the umpteen stumbling blocks that can trip you up between now and your funding success. This is one of the very reasons that I offer my Funding Foreplay Service – to keep my clients out trouble and to make sure that they properly and legally romance prospective investors when they do find them.

If that sounds good, please click Phone Robert and give me two or three times that work for you this week for an introductory phone call. Hopefully, we can find a mutually workable time to set up a call in the next few days.

All the best,


Best regards, Robert Lee Goodman

Robert Lee Goodman, MBA
Ceo & Chief ImpleMentor
Ceo Resource LLC

Elevator Pitch: “I Help Startups Start and Stay Started” With My Services – And My Network of 16,900 Angel Investors.

PS: Although I was past Founder and CEO of my own NASD broker-dealer firm, Goodman Securities Inc., I am NOT an attorney – and I am no longer in the securities business. The above is strictly business advice to try to keep you out of major trouble. Be sure and talk with your own securities attorney about these issues to make sure you’re not violating the law.

If you want to hear the opinion of a securities attorney on this issue, check out this great web page on the subject, Finder’s Fees, written by Chris Barsness, Esq.

PPS: So you live in California and want to try and tap the state’s exemption for paying finder’s fees under the new AB 667 law? Then you better check out what law firm Holland & Hart has to say about the major risk factors to you, the company: Reasons to be Wary of California’s Finder Exemption.  For the issuer (that would be your company): “As to the issuer, consequences can include anything from being held criminally and civilly liable as an aider and abettor of the unregistered broker-dealer activity to being forced to offer rescission to all investors introduced to the issuer by the unregistered broker-dealer.” Another possible impediment to use of the exemption: The lack of a corresponding federal exemption.

PPPS: Fundraising can be pretty treacherous waters for your startup. All of this can be incredibly complex and complicated and frankly overwhelming – which are some of the reasons why I offer my Funding Foreplay Service to companies like yours. If you have never raised investor funds before, it is critically important to make sure you have a very experienced guide to help keep you from making critical, existential mistakes on your path to successful funding!

For the past 23 years, I have focused solely on helping startup and emerging companies with their business planning, fundraising and implementation. During that time, I’ve already directly helped THOUSANDS of diverse startup companies and their CEOs, in 49 of the 50 states, in more than 46 countries, on six of the seven continents in more than 150 different industries. 

How can I best help you and your company?