Can You Reward Investors for Referring Other Investors?
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Your best source of new investors is often existing ones, so sponsors ask whether they can reward them. The answer depends on what the reward is and how it is tied to the money raised. Asking for an introduction is normal. Paying for each investor who commits is where the law gets strict. This post sorts what is usually fine, what is risky and what to ask a securities attorney. It is general information, not legal advice.
Why does payment matter?
A person who is in the business of effecting securities transactions for others generally must register as a broker-dealer. Transaction-based pay, such as a percentage of the money raised, is one of the strongest signs (SEC guide, 15 U.S.C. 78o). A narrow safe harbor exists for certain issuer employees (17 CFR 240.3a4-1), and it does not make paying outside referrers simple. See paying capital raisers.
What is usually fine, risky or needs advice?
| Idea | Usually | Why |
|---|---|---|
| Asking an investor, "Do you know anyone who might want to hear about our next deal?" | Fine | Just a request. Contact the person only if the exemption allows |
| A personal thank-you note or small gift not tied to the amount | Generally fine | Not transaction-based. Keep it modest and consistent |
| Cash per referred investor | Risky | Transaction-based pay |
| Percentage of money raised | High risk | Classic broker-dealer pattern |
| Bonus units or better terms for referring | Needs advice | Disclosure and different-treatment issues |
| Discounted fee for the referrer | Needs advice | Could be seen as compensation tied to investors |
| Contest prizes for most referrals | Risky | Rewards volume of investors |
What about the person who is referred?
Rule 506(b) allows offers only to people with whom you or someone acting for you has a pre-existing, substantive relationship. A friend of an investor is not automatically that. The referrer can tell the friend you exist, and you decide how to build a relationship before any offer. In 506(c), you can reach anyone but must verify accreditation. See can followers invest under 506(b) and what is general solicitation.
How can you grow through investors lawfully?
- Deliver a good experience. Clear updates and on-time distributions create word of mouth.
- Ask for introductions plainly, and let the person choose.
- Offer a way to join your list that the friend uses on their own.
- Host an educational event open to investors' friends, without a sales pitch for a specific offering unless it is allowed.
- Say thank you in a way that is not connected to the money.
- Do not publicize any reward as a reason to refer.
What must you disclose?
If any investor or other person is paid or receives better terms in connection with the offering, the documents should say so, and antifraud rules apply to omissions (17 CFR 240.10b-5). Side arrangements are a common source of disputes. See side letters.
Our take
The cleanest growth is a good deal, honest reporting and investors who bring their friends because they want to. If you want to pay anyone, treat it as a legal project, not a marketing idea.
Trade-offs and who this is not for
- Not a referral-fee scheme. Keep rewards out of the money.
- Common mistake: a quiet cash thank-you to a friend who "brought in" five investors.
- Not a substitute for counsel.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5+ units from friends and followers who already trust them, under Rule 506(b) or 506(c). We are software, legal document preparation, escrow coordination and verification services. We are not a law firm, broker-dealer, investment adviser, funding portal, bank or escrow agent, and we do not hold investor money: investors wire their money to escrow at Enterprise Bank & Trust, in the deal's name.
DoorRaise keeps the deal in its own company with its own documents and a deal page, and runs an accreditation check on every investor, in 506(b) and 506(c) raises. Flat fees, never a percentage of the raise (see pricing). Create your free sponsor page.
FAQ
Can I pay an investor a fee for referring another investor?
Probably not without legal advice. Pay tied to the amount raised can raise broker-dealer registration issues.
Can I give an investor a gift for a referral?
A modest thank-you not tied to the amount is lower risk. Ask your attorney, and keep it consistent.
Can I give referring investors better terms?
That raises disclosure and fairness issues and needs advice.
Can a referred friend invest right away?
Only if they qualify and you can lawfully make the offer to them under your exemption.
Sources
- 17 CFR 240.3a4-1
- SEC, guide to broker-dealer registration
- 15 U.S.C. 78o, registration of brokers and dealers
- 17 CFR 240.10b-5
This article is general information, not legal, tax or investment advice. Talk to a securities attorney before you pay or reward anyone connected to an offering. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.