Sponsors often assume broker-dealer laws apply only to third parties. That assumption is risky.
Transaction-Based Compensation Is the Trigger
Receiving compensation tied to capital raised can trigger broker-dealer requirements.
This includes:
- Success fees
- Percentage-based compensation
- Indirect economic benefits tied to fundraising
Sponsors who compensate others improperly can face regulatory exposure.
Finder Arrangements Are High Risk
“Finders” are frequently used and poorly understood.
Improper finder arrangements can:
- Void exemption eligibility
- Create rescission rights
- Trigger regulatory scrutiny
Many are illegal even when common.
Counsel Identifies Red Flags Early
Experienced securities counsel can:
- Structure compensation appropriately
- Identify when registration is required
- Avoid tainting the offering
Fixing broker-dealer problems after the fact is expensive and uncertain.
Conclusion
Broker-dealer issues are often invisible until they are catastrophic. Sponsors who raise capital repeatedly must understand where these lines exist and structure accordingly.
By Ferd E. Niemann IV, Partner at Niemann Law Group (www.NiemannLawGroup.com), a firm that specializes in representing real estate and business owners and operators with a myriad of complex transactions. In addition, Mr. Niemann’s investing experience includes: owned/operated 26 manufactured housing communities across over 1,700 sites; SFH flips, SFH buy and hold; multifamily; and experience navigating options as a limited partner in medical, multifamily, storage, restaurant, green energy, and other asset classes.
