Independent sponsor fees disclosure: when referral income needs investor consent

Do independent sponsors and searchers have to disclose referral income?

Usually yes, to the people whose money or trust backs the vehicle, when the introduction involves a company the sponsor controls, is pursuing or advises. The answer depends on your operating agreement, side letters, search fund documents and any co-investor terms, not on a single rule. The safe default is written disclosure before the introduction and written consent where the document requires it.

This is general information, not legal, tax or financial advice. Confirm with your own securities counsel before acting.

Independent sponsors and searchers differ from a fund manager in one respect that matters here. You answer to capital partners deal by deal, so every fee, rebate or reward that touches a target or portfolio company is a potential conflict between you and them.

Why capital partners care about small rewards

Investors in an independent sponsor deal or a search fund read your documents for one thing above others: are your incentives aligned with theirs? A referral reward is small beside a closing fee, but an undisclosed one invites the question of what else was not mentioned.

Three situations, three different answers

Where you stand with the company drives the analysis. Use this table as a starting map for the conversation with counsel.

The 3-question introduction test for sponsors

Run every potential introduction through three questions before you speak to the company.

• Whose money is nearby? Does any investor, lender or co-investor have a claim on this company or on your time that the reward could affect?
• Whose consent is needed? Does the company, a seller, a lender or an investor need to approve or be told?
• What does the paper say? Does your operating agreement, side letter or search fund agreement address fees from third parties, and is that language reflected in your own disclosure habits?

A "yes" to any item means counsel and a written disclosure before the introduction.

A step-by-step disclosure approach

1. List every document that governs your obligations: operating agreement, management or advisory agreement, side letters, search fund investor documents and any lender covenants.
2. Mark every clause about fees, outside activities, related parties and confidentiality.
3. Decide with counsel whether the SourceX arrangement counts as a fee, a related-party benefit or outside income under those clauses.
4. Draft a short written notice that says who pays the reward, when it is paid, what it is a share of and what it is not deducted from.
5. Send the notice to the investor committee or lead investor, and to the company's sponsor, before the introduction.
6. Keep the notice, any consent and the date in your deal file.

Wording you can adapt

Counsel should review the wording against your documents. Do not state a reward amount; the program terms govern the details and are published on the program terms page.

What about broker registration and finders?

Some sponsors worry that earning a fee for introductions in a securities context creates a registration problem. Data licensing is a different activity from raising capital, but the finder rules show how regulators think. The SEC proposed a conditional finder exemption in 2020, and its small business advisory committee notice confirms the proposal was not finalized; see the committee meeting notice. No exemption or safe harbor is described here as covering SourceX partners. If you also raise capital or receive fees tied to securities transactions, ask counsel whether those activities are separate. The guide to the M&A broker exemption explains why that exemption does not address data-licensing introductions.

Where this fits with other conflict topics

Sponsors with a fund-style structure should read the overview of private fund fees and conflicts, which describes how regulators look at fee disclosure. Service providers that sit close to operating companies face the same disclosure question, covered in MSP vendor referral fees and in the management consultant fee guide. If you sit in a larger firm's operating team instead, see referral opportunities for private equity operating partners.

How rewards work for a sponsor

Partners earn 25% of the eligible platform fees SourceX actually collects from the referred company's licensing deals, capped at $100,000 per referred company. Rewards become payable only after the buyer pays and SourceX receives its fee. A lead, meeting or signed agreement alone does not trigger payment, and no reward is guaranteed. The reward comes from SourceX's fee and is never deducted from what the company receives.

Common mistakes

Next step

Run one company through the company fit checker, send the disclosure notice, then register as a partner. A company can also apply directly at sourcex.si/apply.