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Is it Legal to Receive Finder's Fees for Referring Capital to Startups?

Starting a business can be a challenging endeavor, and one of the key challenges for many entrepreneurs is finding the capital necessary to get their ventures off the ground.

Many startup founders turn to outside investors to help fund their businesses, and it's not uncommon for individuals or firms to offer to help connect these founders with potential investors in exchange for a commission, or "finder's fee."

But is this practice legal? Let’s take a closer look at the legality of finder's fees in the United States and what entrepreneurs should be aware of when seeking capital for their startups.

Interestingly, it is illegal in the United States for individuals or firms to receive commissions for referring capital to startups or other private companies. This is regulated by the Securities and Exchange Commission (SEC) under Regulation D of the Securities Act of 1933. The SEC's ban on commissions, also known as "finder's fees," is intended to protect investors from being unduly influenced by the prospect of personal financial gain when deciding where to invest their money. Instead, firms and individuals must be registered as broker-dealers in order to legally provide such services.

Here are a few resources that may be helpful for startup entrepreneurs looking for registered broker-dealers who can help refer capital:

1. FINRA's BrokerCheck: This tool allows you to search for and verify the registration and background of registered broker-dealers and their associated professionals.

2. The Securities and Exchange Commission's (SEC) Investment Adviser Public Disclosure (IAPD) website: This website allows you to search for and access information about registered investment advisers, including whether they are registered as broker-dealers.

3. Your local Small Business Administration (SBA) office: The SBA offers a variety of resources and services to help small business owners, including assistance in finding financing and connecting with potential investors.

4. Professional organizations and trade associations in your industry: These organizations may have lists of member firms that are registered broker-dealers and may be able to offer guidance on finding financing.

5. Your personal network: You may be able to find broker-dealers through your own network of professional contacts or through recommendations from other entrepreneurs or business advisors.

So, while it may be tempting to seek out a finder's fee as a way to help finance your startup, it's important to understand that this practice is generally illegal in the United States. However, this doesn't mean that you're out of options when it comes to finding capital for your business. By working with registered broker-dealers, utilizing resources like FINRA's BrokerCheck and the SEC's IAPD website, and tapping into your own network and professional organizations, you can find legal and ethical ways to secure the financing you need to bring your business to life. With determination, hard work, and a little bit of know-how, you can successfully navigate the process of finding capital for your startup and turn your entrepreneurial dreams into a reality.

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