How To Raise Capital From Investors For A Regulation D Offering Without Using Broker-Dealers

The Core Rule: Why You Need Two Exemptions, Not Just One

Most sponsors think raising capital under Regulation D is a one-exemption problem. It isn’t. You actually need two exemptions working at the same time, and missing the second one is where sponsors get into real trouble.

The first exemption covers the securities. The second exemption covers the people selling them. Regulation D handles the first. Rule 3a4-1, sometimes called the Issuer Exemption, handles the second.

If you only solve for one, you have a problem you do not need. The offering can be perfectly exempt under Rule 506(b) or 506(c), and you can still have an illegal, unregistered broker sitting in the middle of your raise.

The Offering Exemption vs. The Solicitor Exemption

Regulation D is an exemption for the securities. When you file under Rule 506(b) or 506(c), you are saying the interests in your issuer do not have to be registered with the SEC as a public offering. That’s the paper.

Here’s the part people miss: Regulation D only covers the paper. It says nothing about who is allowed to sell it. The exemption for the security is not an exemption for the person soliciting the investment.

That’s a separate question, and it comes from a different statute. Section 15(a) of the Securities Exchange Act generally requires anyone in the business of effecting securities transactions to be a registered broker-dealer. If you are soliciting investors and getting paid for it, Section 15(a) is looking at you.

So the person doing the raise needs their own legal footing. Either they are a licensed broker-dealer, or they fit an exemption from broker-dealer registration.

Rule 3a4-1 is that exemption for an internal raise. It’s a safe harbor that lets certain people inside the issuer – principals and bona fide employees – participate in selling the securities without registering as a broker-dealer, as long as they meet its conditions. If you want the practical mechanics of how the offering itself is structured, our Rule 506(b) and 506(c) offering guidance walks through those distinctions.

Why the Label on the Agreement Does Not Protect You

A common instinct is to solve this with drafting. Call the person a “consultant.” Call them a “marketing partner.” Sign an independent contractor agreement and assume the label controls.

It doesn’t. Regulators look at the economic reality, not the title on the paper. They ask what the person actually does and how they actually get paid.

If someone is soliciting investors and getting paid based on the money that comes in, it does not matter what the agreement calls them. Clever drafting cannot override federal securities law. You can write “consultant” at the top of the page, but if the substance looks like broker activity, it is broker activity.

The Finder’s Fee Trap: Why Paying for Introductions Is Illegal

No, you cannot legally pay a consultant, a friend, or a “finder” a success fee for introducing you to investors. Paying transaction-based compensation to an unregistered person violates federal securities law, and it hands your investors a rescission right you do not want to give them.

This is the single most common way sponsors get themselves into trouble. Someone offers to introduce you to their network of investors in exchange for a cut of what comes in. It sounds like an easy shortcut. It is not. It is a violation waiting to be discovered.

The Illusion of the “True Finder”

Sponsors think finders are legal because they have heard that a “true finder” exemption exists somewhere in old SEC guidance. There is a grain of truth to that, and it is exactly enough to get people into trouble.

The SEC has issued no-action letters over the years describing narrow situations where someone could make an introduction without registering as a broker-dealer. The problem is the conditions. A true finder can essentially make an introduction and nothing more. They cannot negotiate, cannot recommend the investment, cannot handle money, cannot participate in the deal discussions, and critically, cannot be paid based on whether the investment closes.

In the real world, nobody wants that job. The person offering to help you raise money wants a percentage of what comes in. The moment they take that percentage, they are no longer a “true finder.” They are an unregistered broker.

So for a modern fund manager or syndicator, the finder exemption is practically unusable. The version people actually want to use is the version that is illegal.

The Danger of Transaction-Based Compensation

Transaction-based compensation is any payment tied to the success of the raise. That is the trigger. If someone gets paid more when more money comes in, the SEC treats that as broker-dealer activity under Section 15(a) of the Exchange Act.

The examples are straightforward. Paying someone 2% of the capital they bring in is transaction-based compensation. Paying a bonus only if the fund hits its target is transaction-based compensation. Giving someone a slice of the promote tied specifically to the investors they introduced is transaction-based compensation.

It does not matter what you call the payment. A “referral fee,” a “marketing fee,” a “consulting fee” calculated as a percentage of the raise – the label does not change the analysis. The SEC looks at the math. If the payment moves with the capital, it is a commission, and only a licensed broker-dealer can earn a commission for selling securities.

This is the distinction that matters. A licensed broker-dealer can be paid based on the raise because they are registered to do exactly that. A true employee or a contractor paid a flat or hourly rate for real work is fine, because their pay does not depend on the raise. A sponsor principal raising money for their own deal has a path under the issuer exemption. An unregistered person taking a cut of the capital has none of those things.

If you are trying to understand whether a specific arrangement crosses the line, read our detailed discussion of the rules regarding finder’s fees before you sign anything.

The Rule 3a4-1 Safe Harbor: Who Can Actually Raise the Capital?

If you skip the broker-dealer, the people who solicit investors have to be your own people. Rule 3a4-1 is the safe harbor that lets principals and bona fide employees of the issuer participate in the raise without registering as broker-dealers.

The catch is that they have to actually be part of the operating business. They cannot be salespeople in disguise.

Qualifying as an Associated Person of the Issuer

The exemption only covers associated persons of the issuer. That means partners, officers, directors, or genuine employees of the sponsor or the fund itself.

An outside third party does not qualify. If you retain a marketing firm whose whole job is to go find and close investors, that firm is not an associated person of the issuer, and you are back in broker-dealer territory.

This is the part sponsors get wrong most often. They think they can hire an outside “investor relations” or “capital markets” shop, pay it to solicit, and treat it as internal. In the real world, that arrangement usually breaks Rule 3a4-1, because the firm is neither an employee nor a principal of the issuer.

The person soliciting has to be inside the tent. If they are not on the payroll or in the cap table of the sponsor, do not assume 3a4-1 covers them.

The ‘Substantial Duties’ Requirement

Being an employee is not enough by itself. Rule 3a4-1 also requires that the person perform substantial duties for the issuer other than raising capital.

Think acquisitions, underwriting, asset management, operations, investor reporting – real work that exists whether or not there is a live offering. The capital raise is one part of a broader job, not the entire job.

The failure case is the person whose only function is to dial for dollars and close investors. If that is all they do, they look exactly like a broker, and the label on their offer letter will not save you. Regulators look at what the person actually does, not what you call them.

Two more limits matter here. First, the person generally cannot have worked as a registered broker-dealer or associated person of one in the past twelve months. If you just hired someone off a broker-dealer’s desk to run your raise, that timing is a problem. Second, the safe harbor limits how often the person participates in offerings. As a general matter, they cannot participate in more than one offering every twelve months.

That twelve-month rule has real nuance for continuous or evergreen funds that stay open, and the analysis is not the same as a single closed-end deal. If you are running a fund that raises on a rolling basis, do not assume the once-a-year framing applies cleanly. That is a spot where I would want to look at the specific structure before relying on it.

How to Legally Compensate Your Internal Investor Relations Team

If you can’t pay commissions, you pay salary. Internal team members who help raise capital get a flat salary or an hourly rate that has nothing to do with how much money comes in the door.

The reason is the same one that sinks the finder’s fee: transaction-based compensation is the signal regulators use to identify unregistered broker activity. Once someone’s pay moves with the size of the raise, they start to look like a broker, and Section 15(a) becomes your problem.

So the fix is to break the link between what they earn and how much capital they bring in.

Salary and Hourly Structures

Pay them a consistent W-2 salary. That’s the clean path.

The employee makes the same amount whether the fund closes $2 million this quarter or nothing at all. Their check does not go up because they had a good month talking to investors.

Hourly works too, as long as the rate is the rate. You are paying for their time and their operational role, not for the dollars they closed.

What you cannot do is have their pay swing based on the volume of capital raised in a given month or quarter. The moment the number on the paycheck tracks the number on the raise, you’ve built a commission and called it something else.

The Rules for Year-End Bonuses

You can still reward a good employee. A discretionary bonus is fine. The question is what the bonus is tied to.

Tie it to overall company performance, or to the employee’s broader operational duties – acquisitions, asset management, running the deal after the money is in. That keeps the bonus connected to their real job, not to their solicitation activity.

What breaks the exemption is a bonus that is mathematically correlated to capital raised. If the formula is “2% of everything she brought in,” or “an extra check if the fund hits its target,” that is transaction-based compensation. It doesn’t matter that you paid it in December instead of at each closing.

The test is whether you can draw a straight line from the dollars raised to the dollars paid. If you can, it’s a commission, and it’s fatal to the Rule 3a4-1 safe harbor.

If it were me, I’d keep the bonus genuinely discretionary and document it against company-wide results. Don’t put the formula in writing, and don’t let anyone on the team believe their bonus is a percentage of the raise. The paper and the practice both need to say the same thing.

Rule 506(b) vs. Rule 506(c): How Marketing Rules Limit Your Internal Team

Which Regulation D exemption you pick decides how your internal team is allowed to communicate with investors. The compensation rules from Rule 3a4-1 stay the same either way. But the marketing rules change dramatically, and that changes what your people can and cannot do day to day.

Rule 506(b) prohibits general solicitation. Rule 506(c) permits it but adds an accreditation-verification requirement. That single difference reshapes the workflow for the internal team.

Raising Capital Under Rule 506(b)

Under Rule 506(b), your internal team can only work with investors the issuer already knows through a pre-existing, substantive relationship.

That means no public websites pitching the deal, no social media blasts, no email campaigns to purchased lists, and no cold outreach to strangers. If the team goes out and finds new investors through advertising, you have generally solicited, and you have blown the 506(b) exemption.

So the internal team’s job under 506(b) is narrow. They manage relationships the sponsor already has. They answer specific questions about a specific deal for investors who already know the sponsor.

That is fine. It is normal. It just means the team is servicing an existing investor base, not building one through public marketing.

Raising Capital Under Rule 506(c)

Under Rule 506(c), general solicitation is allowed. The internal team can run ads, host public webinars, and market the offering openly. The tradeoff is that every purchaser must be accredited, and the issuer has to take reasonable steps to verify that, not just take the investor’s word for it.

Here is the part sponsors get wrong. The right to advertise is not the right to act as a broker.

The person running the webinar and answering the leads still has to be a bona fide employee under Rule 3a4-1, with real operational duties, paid a flat salary. They cannot take a commission on the capital that comes in through those ads.

Advertising changes how you reach people. It does not change how you pay the people doing the reaching.

What Happens When an Unregistered Broker Taints the Deal

If you pay someone a success fee to raise your capital and that person is not registered, you have not just created a technical foul. You have handed every investor in the deal a legal reason to demand their money back. That is the consequence, and it is severe enough that it should end the conversation about finders entirely.

The Threat of Rescission

Rescission means the investor gets to unwind the sale and force the fund to return their principal, usually with interest.

Think of it as a put option you accidentally wrote for every investor in the offering. If an unregistered broker was involved in selling the securities, the investor can argue the sale itself was defective and demand to be made whole.

Here is why that matters in the real world. Nobody asks for their money back when the deal is going well.

Rescission becomes a problem when the assets underperform and investors are already unhappy. Their lawyer goes looking for a compliance flaw, and an illegal finder’s fee is an easy one to find.

Now you are forced to write rescission checks at the exact moment the fund has no spare cash. That can drain the capital you need to operate, and in a bad scenario it can take the whole thing down.

Regulatory Action and Future Raises

The SEC and state securities regulators can act on unregistered broker activity independently of any investor lawsuit.

They can issue a cease-and-desist order, impose fines, and require disgorgement of the fees paid. That is disruptive, but it is not the worst part for a sponsor who plans to keep raising capital.

The worse problem is disqualification. Regulation D includes bad actor rules under Rule 506(d), and certain regulatory orders can trigger them.

If you get flagged, you can lose the ability to use Rule 506 at all. That means the exemption you built your entire capital-raising model around is gone, and you are shut out of the market you rely on. For anyone who intends to run more than one offering, this is the reason the finder shortcut is not worth it. The clean path under the rules discussed above is the only path that keeps you in business.