Posted in Uncategorized
By Tony Liu, Founder and Principal Business Trial Attorney
In Summary:
Finder’s fees can look harmless, just a thank-you for an introduction, but under federal and California law, taking or paying referral commissions tied to investments can make you an unregistered broker. That’s a serious legal problem carrying fines, rescission claims, and even criminal exposure. This article explains how SoCal entrepreneurs can tell the difference, avoid violations, and protect legitimate referral relationships.
Why Everyone’s Suddenly Talking About Finder’s Fees
After the Yorba Linda Ponzi scheme arrest of Linh Thuy Le and Trong Luu, the husband-and-wife team behind Inventis Ventures Holding Inc., reports surfaced that roughly $1.5 million in referral commissions had been paid to people who brought in new investors. That detail caught the SEC’s eye—and should catch yours, too.
Business owners in Orange County often reward referrals with cash or equity, unaware that the moment a payment depends on closing an investment or loan, it can trigger broker-dealer laws.
What Counts as “Broker-Dealer” Activity?
The SEC and California regulators define a broker broadly:
“Anyone engaged in the business of effecting transactions in securities for the account of others.”
The Reves and Howey Touchpoints
Even if you never call yourself a broker, the SEC looks at behavior—not titles. Red flags include:
- Introducing investors to a company raising money
- Negotiating or advising on investment terms
- Receiving transaction-based compensation (a percentage of invested funds or success fees)
- Handling investor funds or communications
Do two or more of these, and regulators may say you’ve “effected a securities transaction” without registration.
Why It Matters for Small Businesses
Violating broker-dealer rules can create a domino effect:
- Contracts become voidable. Investors can demand their money back—even if your business wasn’t fraudulent.
- Regulatory penalties. The SEC and California’s Department of Financial Protection & Innovation (DFPI) can impose fines or injunctions.
- Civil lawsuits. Anyone who paid or received the improper fee can get pulled into litigation.
- Reputation damage. Being linked to an unregistered offering scares away future investors and lenders.
Even well-meaning founders who just wanted to “reward referrals” can find themselves answering subpoenas. Our business litigation attorneys at Focus Law help business owners respond strategically to SEC or DFPI inquiries while protecting their company’s reputation.
Safe Ways to Reward Introductions
You can still thank people for helping your business—legally.
1. Use a Flat-Fee Marketing Agreement
Pay for promotional services, not for closed deals. Keep the payment the same regardless of outcome.
2. Separate Sales From Securities
If you sell actual products or services, it’s generally safe to pay commissions on sales revenue, not investments.
3. Work With Registered Brokers
If you must raise capital, partner with a licensed broker-dealer who can legally handle commissions.
4. Put It in Writing
Document the scope: “This agreement does not authorize solicitation or negotiation of securities transactions.” Review it with counsel before anyone gets paid.
Real-World Red Flags for SoCal Entrepreneurs
- “15% guaranteed monthly returns”, unrealistic yields that signal possible fraud.
- “Cash or Zelle only”, difficult for auditors or law enforcement to trace.
- “Tell your friends, and we’ll pay you a cut.”, a classic unregistered-broker pitch.
When you hear those phrases, step back and run due diligence before you participate.
How to Protect Your Business
- Audit all referral relationships. Ask: is payment contingent on an investment?
- Check licenses. The Financial Industry Regulatory Authority (FINRA) database lists registered brokers.
- Get a legal review. A quick compliance consultation can prevent a costly SEC or DFPI inquiry later.
- Educate your team. Many violations start with enthusiastic employees or community contacts unaware of the rules.
Frequently Asked Questions
1. Is it ever legal to pay a finder’s fee in California?
Yes—but only for introducing parties in non-securities transactions (like real-estate listings or standard business sales). If the fee depends on investment success, registration is likely required.
2. What if I only made one introduction?
Even a single compensated introduction tied to an investment can violate broker-dealer laws. The “one-time exception” myth is common but wrong.
3. How do I know if something is a “security”?
Courts apply the Howey test—if people invest money expecting profits from others’ efforts, it’s usually a security. Promissory notes, convertible loans, and profit-sharing agreements often qualify.
4. Can my company lose its exemption if an unregistered finder helped?
Yes. The use of an unregistered broker can void private-offering exemptions (like Rule 506), exposing you to rescission risk and SEC scrutiny.
5. What should I do if I already paid or accepted a finder’s fee?
Stop further payments, preserve all records, and seek counsel immediately. Voluntary disclosure and corrective steps often reduce penalties.
6. Do referral programs for customers count?
Typically no—if rewards are tied to product sales, not securities. But clarity in your terms and documentation is critical.
Conclusion: Keep Your Network, Lose the Risk
Referrals fuel business growth—but when money changes hands around investments, the legal landscape shifts fast.
By understanding broker-dealer boundaries, documenting relationships correctly, and reviewing agreements before paying commissions, you can protect your company from SEC and DFPI action.
If you’ve paid or received a finder’s fee and want to ensure compliance, contact Focus Law in Anaheim for a confidential consultation. We’ll review your agreements, spot red flags, and help you stay on the right side of the law—so your reputation and growth stay intact.
