Finders vs. Broker-Dealers: Key Differences in Capital Markets

last updated Tuesday, March 11, 2025
#broker-dealer #

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by John Burson

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Navigating the capital markets can be complex, especially when understanding the roles of different market participants. In particular, the distinction between finders and broker-dealers is critical for companies seeking capital and investors looking for opportunities. While both play roles in connecting buyers and sellers of securities, their regulatory obligations and legal responsibilities differ significantly.

Understanding Finders and Broker-Dealers

What Is a Finder?

A finder is an individual or entity that introduces potential investors to securities issuers. Finders typically do not participate in negotiations, structure transactions, or handle funds. Their primary role is limited to making introductions, and their compensation is often contingent on successful transactions.

Fig 1. The Finder (TV Series 2012) - IMDb

What Is a Broker-Dealer?

A broker-dealer is a registered entity that engages in buying, selling, and facilitating securities transactions. Broker-dealers must register with the Securities and Exchange Commission (SEC) and become members of the Financial Industry Regulatory Authority (FINRA). They are subject to strict compliance, reporting, and capital requirements.

Key Differences Between Finders and Brokers

Feature	Finder	Broker
Regulatory Oversight	Not required to register with the SEC (in most cases)	Must register with the SEC and FINRA
Role in Transactions	Limited to introductions	Facilitates securities transactions
Compensation Structure	Typically a one-time fee for introductions	Earns commissions, fees, or markups
Engagement in Negotiations	No involvement	Actively negotiates and structures deals
Custody of Funds	Does not handle funds	Can handle client funds and securities
Fiduciary Duty	Generally none	Has fiduciary and compliance obligations
Compliance Requirements	Minimal	Extensive, including reporting and record-keeping

Aspect	Finder	Broker
Role	Introduces investors to opportunities	Facilitates transactions and compliance
Regulation	Limited, but must avoid acting as an unlicensed broker	SEC and FINRA regulated
Compensation	Fixed fee or percentage of funds raised	Commission-based or structured fees
Transaction Involvement	Limited to introductions	Actively involved in negotiations and execution

Regulatory Considerations

The SEC has taken a strict stance on individuals or firms operating as unregistered broker-dealers. If a finder engages in activities beyond mere introductions—such as negotiating deals, advising on transactions, or handling investor funds—they may be deemed an unregistered broker-dealer, potentially facing enforcement actions.

However, there have been discussions regarding creating a regulated finder exemption to provide clearer guidelines for limited intermediary roles. In 2020, the SEC proposed a conditional exemption for certain finders, categorizing them as Tier I and Tier II finders, depending on their level of involvement in capital-raising activities.

Why Does This Distinction Matter?

Understanding the difference between finders and broker-dealers is crucial for issuers, investors, and intermediaries. Companies raising capital must ensure they work with properly registered professionals to avoid regulatory violations. Investors, on the other hand, should verify the credentials of intermediaries to ensure they are dealing with compliant and qualified market participants.

Final Thoughts

The roles of finders and broker-dealers serve different functions in the capital markets. While finders can provide valuable introductions, broker-dealers offer a higher level of service with regulatory protections. Companies and investors must evaluate the type of intermediary they engage with to ensure compliance and mitigate risks in their transactions.

For businesses seeking to raise capital, consulting with a legal or financial professional can help navigate these distinctions and ensure adherence to SEC regulations.

 
 
 

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