Between a sponsor with an offering and an advisor with a client sits a chain of contracts. The selling agreement is the one that connects the offering distribution to the firms whose advisors will actually recommend it, and it is where a great many practical questions get answered — or, more often, left ambiguous.
The structure of a distribution
A typical non-traded offering distributes through three layers:
The sponsor creates and manages the program.
The dealer manager — a broker-dealer, frequently affiliated with the sponsor — manages distribution. It assembles the selling group, allocates compensation, reviews and approves marketing materials, and acts as the interface between the sponsor and the selling firms.
Participating broker-dealers — often independent broker-dealers — whose advisors recommend the offering to clients.
The dealer manager agreement governs the first relationship. Selling agreements govern the second, one with each participating firm.
Nearly all such offerings are conducted on a best-efforts basis: the distributor undertakes to try, not to guarantee a result. This is why non-traded programs raise progressively over an offering period rather than closing a fixed amount at once, and it is the structural opposite of a firm-commitment underwriting.
What the agreement covers
Compensation. Selling commissions payable to the participating firm, any dealer manager fee reallowance, ongoing shareholder servicing fees and how long they continue, the treatment of different share classes, and when and how payment occurs. In perpetual products the ongoing component matters more over time than the upfront one.
Representations. Each party as to its regulatory standing — FINRA membership, registrations, licensing of personnel, and absence of disqualifying events.
Responsibilities. Who does what on diligence, suitability, supervision, and handling of subscription documents and funds.
Marketing. Almost always a restriction on using any materials not approved by the dealer manager. This exists because unapproved material creates liability for the sponsor and can, in a Rule 506(b) offering, raise general solicitation questions that threaten the exemption itself.
Information flow. What the dealer manager will provide — offering documents, diligence materials, updates, and notice of material developments.
Indemnification. Typically mutual, with each party indemnifying the other for losses arising from its own breaches or misstatements. The scope and the carve-outs are heavily negotiated.
Term and termination, usually with a short notice period on either side.
The point that matters most
A selling agreement allocates responsibilities between commercial parties. It does not, and cannot, transfer a regulatory obligation.
A participating firm that recommends an offering has its own obligation to conduct a reasonable investigation of it, and its own suitability and best interest obligations to its customers. A contractual provision stating that the dealer manager has performed diligence, or that the participating firm may rely on materials provided, does not discharge either. See reasonable-basis diligence.
What the agreement usefully does is establish information flow — obliging the dealer manager to provide what the participating firm needs in order to discharge its own obligations, and to notify it of material developments during a continuing offering. A firm negotiating a selling agreement should focus there, and should be sceptical of any provision that reads as though it removes a duty.
The corresponding point for dealer managers: a provision purporting to shift diligence responsibility onto participating firms is equally ineffective as to the dealer manager own obligations.
Where the allocation genuinely matters
Suitability and best interest at the point of recommendation belong to the firm whose advisor makes it. This is generally uncontroversial and should still be stated.
Product-level investigation is owed by each firm that recommends, which means it is genuinely duplicative across a selling group. This is why the third-party due diligence market exists — it is more efficient for many firms to review a common report and add their own assessment than for each to replicate the underlying work.
Subscription document handling — who reviews for good order, who resolves deficiencies, and how funds are transmitted. Rule 15c2-4 governs the handling of customer payments in contingency offerings, and the operational reality is covered in subscription document processing.
Ongoing obligations during a continuing offering. Programs remain open for years, and a firm that reviewed an offering at onboarding and never revisited it is relying on a stale assessment. The agreement should specify what updates the dealer manager will provide and when.
Compensation limits. Total organisation and offering expenses and underwriting compensation must fit within the applicable limits under FINRA Rule 2310 where it applies. Because compensation flows through several parties, the aggregate calculation is a shared concern rather than any single party.
The RIA channel
Registered investment advisers who are not FINRA members do not enter selling agreements in the same form, because they are not being compensated through selling commissions. They typically access programs through advisory share classes carrying no upfront commission and little or no ongoing servicing fee, with the adviser compensated by the client directly.
The obligations differ correspondingly: an RIA owes fiduciary duties under the Advisers Act rather than FINRA suitability obligations, and FINRA rules including Rule 2310 do not apply to it.
This asymmetry has real consequences. The same program can reach an investor through two channels with different share classes, different total costs, and different regulatory frameworks governing the recommendation. Which channel an investor is in is worth knowing, and it is rarely explained.
Practical guidance
For participating firms: read what the agreement obliges the dealer manager to provide, not just what it says about responsibility. Negotiate for update obligations during continuing offerings. Do not treat any provision as removing your own diligence duty, and do not rely on one that appears to.
For sponsors and dealer managers: ambiguity in the allocation of subscription handling and ongoing information is the most common source of friction, and it surfaces at the worst time — when something has gone wrong and both parties believed the other was responsible. Specificity costs nothing at drafting.
This guide is educational and general; it is not legal or compliance advice. Selling agreement terms vary; consult qualified securities counsel.
Frequently Asked Questions
What is a selling agreement?
The contract between the dealer manager for an offering and a participating broker-dealer that will solicit investors. It sets out compensation, each party responsibilities for diligence and suitability, representations about regulatory standing, marketing restrictions, indemnification, and termination.
What is a dealer manager?
The broker-dealer, often affiliated with the sponsor, that manages the distribution of an offering. It coordinates the selling group, allocates compensation, oversees marketing materials, and interfaces between the sponsor and the participating firms.
What is a best-efforts offering?
An offering in which the distributor agrees to use its best efforts to sell securities without guaranteeing that any particular amount will be raised. Non-traded programs are almost always distributed on this basis, which is why they raise capital progressively rather than all at once.
Who is responsible for suitability in a selling group?
The participating broker-dealer that makes the recommendation to the customer owes the suitability and best interest obligations for that recommendation. The dealer manager and the sponsor have their own obligations relating to the offering itself. The selling agreement should state the allocation clearly, and a well-drafted one does.
Can a selling agreement transfer diligence responsibility?
Not effectively. A participating firm has its own obligation to conduct a reasonable investigation of an offering it recommends, and a contractual provision cannot discharge a regulatory obligation. Selling agreements typically address information flow and representations rather than attempting to shift the underlying duty.
Sources
- FINRA Rule 2310 (Direct Participation Programs) and FINRA Rule 5123 (private placements)
- FINRA Rule 2111 (Suitability) and FINRA Rule 3110 (Supervision)
- SEC Regulation Best Interest, Exchange Act Rule 15l-1
- FINRA Regulatory Notice 10-22 (reasonable investigation in Regulation D offerings)
