My name is Tilden Moschetti. I’m the founder of Moschetti Syndication Law Group. One question we oftentimes hear is, “Can I and how can I compensate others for marketing my syndication?”
There are times when raising capital, as the deadline for syndicators approaches, that you suddenly find you need much more cash than you have. It becomes tempting to use other people to raise capital.
So the question is, how do you compensate others for finding those investments? Well, the basic answer is you can’t. There is an allowance in the ‘no action’ letters of the SEC for finders. But the rules put on finders are so onerous, I would not advise a syndicator to take advantage of paying finder fees at all. The punishment is much too great, and the danger is much too high to get into that line of things. So my encouragement would be to not use finders for raising capital, especially for your Reg D offerings.
What you can do is pay licensed broker-dealers. They have a license to be able to raise money for your syndication. One way that I have found works and is completely legal is to use people to help find investors, but pay them on a straight hourly basis. What the SEC doesn’t want you doing is saying, “Hey, I’m gonna pay you 5% of any money that you raise.” They don’t want that money tied in any way to the fundraising business itself. But what you can do is say, “I am going to pay you $20 an hour to make phone calls and bring me a list of people that I can talk to.” There is no problem whatsoever in doing that. They are basically acting as contractors for your business; it’s a safe thing to do.
You can also have people bring in investors to you, but you just can’t pay them. Your friend can refer an accredited investor to you. You just can’t give them money in exchange for the investment. If you do get caught doing that, and if there ever is a problem in the syndication itself, let’s say a lawsuit is filed, the tarnished moment that takes place from having used a finder basically puts the whole investment at risk. If the entire syndication comes crumbling down, that means you are responsible for every penny going back to those investors immediately. To me, that risk is too great. It is illegal, and I would not recommend it by any means.
So you don’t really compensate others to find your investment except if they are a licensed broker-dealer; then have at it. Now, inside your own company, if your partners are a part of the syndication and are raising money, you’re free to negotiate how the ownership or pay structure works among officers themselves. So if you’ve got three partners, you could say whoever brings in the most is going to get an additional 10% of the earnings. You could do that, but you can’t have non-officers take on that role and tie them to any sort of bonus. It’s only for officers of the sponsor that you can do that.
So those are the only ways that I can think of to legally compensate others for marketing your offering: broker-dealers, executives of your sponsor organization, or you just pay people hourly and do not tie compensation with performance.
If you need some help with your syndication, be it for real estate, if you’re an entrepreneur raising capital for your business, or you’re putting together that new cryptocurrency hedge fund, give us a call. My name is Tilden Moschetti. I am a syndication attorney, and if you need help with your private placement memorandums, we’ve got you covered there too.