Bill Mccready scoped out stars for a living, back when he ran a space observatory. Today he scopes out investment dollars for fledgling companies. The consultant, who runs Venture Planners in Carlsbad, Calif., is a "finder." His is a little-known profession, yet one that is playing an increasingly important role in the start-up world. And one that's steeped in controversy.

Simply put, finders are intermediaries who introduce businesses to investors, earning a fee in return. Jeffrey Sohl of the Center for Venture Research at the University of New Hampshire says finders generally operate in "angel territory" of $100,000 to $2 million. Others cite much higher figures.

They may be CPAs, insurance brokers, retired executives, or former politicians; in short, anyone with a fat Rolodex who can locate other people's money.

Some prefer to call themselves business brokers or consultants. Their activities run the gamut. Many just "smile and dial," as McCready puts it, merely handing an entrepreneur a list of cash-rich prospects. McCready usually helps entrepreneurs find and screen investors only after working with them to revise their business plans. His last client, a California entrepreneur with a Web business, raised $250,000 from three angels with his help. The whole process took only six weeks to complete.

Given the current capital crunch and the consolidation in both retail and investment banking, finders are in demand as never before. But that serves only to focus the spotlight on an inconvenient fact: As the law now stands, nearly all finders, whether they know it or not, should be licensed as securities brokers. Very few, it seems, actually are.

"Most finders violate the law all over the place," McCready admits. Richard M. Leisner, a securities lawyer at Trenam Kemker in Tampa, says: "It's interesting that we use the word 'finder' rather than 'unlicensed, illegal, law-breaking, compensation-taking, deal-negotiating broker,' which might be a more accurate term." Though Leisner chuckles at this, he isn't really joking. The unfortunate punch line is that finders' legal problems can spill over to their clients, too.

To be sure, some matchmaking is so limited that it doesn't require a broker's license, but it's hard even for legal experts to say when a finder crosses the line. Little case law exists. In the words of Hugh H. Makens, the former chief securities regulator for Michigan who probably has delved deeper into this world than anyone else, the work of finders constitutes "a vast gray market." There is no standard fee. Commissions of 10% are now said to be common, replacing the once-popular "Lehman formula" of 5% for the first million, 4% for the second million, and so on. Tales are told of even higher fees, sometimes disguised to fool the client. Many finders also charge retainers, and flat fees aren't unheard of.

Finders' character and competence can vary just as widely. "They all have expensive suits, beautiful resumes," says Steve Crane, CEO of CorpHQ, a business incubator in Redondo Beach, Calif., who's worked on the finder problem for the CEO Council, a start-up advocacy group for small public firms. "But how can you tell which are really able to help you?" Victor Della Rossa, a New York musician now running a small talent agency, is still trying to recover $15,000 he paid in 2003 to a finder who promised to secure $5 million in funding for a music-related business. The money never materialized. "It was the full monty," Della Rossa says of his ordeal, which entangled him with Bahamian bank accounts and elusive foreign investors.

But dishonest or incompetent finders aren't the only ones entrepreneurs need to worry about. In a strange paradox, the bigger danger may come from those finders who perform well, because their role in a company's rise can also lead to its downfall.

You may recall that in 1998, disgraced investment banker Michael Milken was charged with acting as an unlicensed broker by negotiating deals and taking success fees. (The case was later settled.) More recently, the SEC made former Tyco director Frank Walsh return a secret $20 million finder's fee for arranging merger talks on Tyco's behalf.

While these cases are exceptional because of the big names and the dollars involved, the same murky rules that applied to them would apply to many other deals. Makens, the former Michigan official who is now an attorney at Warner Norcross & Judd in Grand Rapids, says that payments to a finder can cause an entire transaction to violate securities laws, giving investors a right to undo the deal. Even if investors don't exercise that right, Makens adds, a successful early stage financing that was technically illegal can haunt an entrepreneur: When the business is ready to go public or sell out, it may have to disclose the violations, jeopardizing the pending deal.

How often does the use of a finder turn into a major fiasco? There's no public record, but Mary Sjoquist, chair of an American Bar Association task force studying finders, says that "almost everybody in the bar has seen this." The Securities and Exchange Commission, which is now contemplating the finder problem, has failed to locate hard numbers. State regulators admit that the problem has crept up on them, too, even though they are "closer to the action," in the words of Texas securities commissioner Denise Voigt Crawford. Some states, including Texas, are now trying to track finders' activities.

Why don't finders get licenses just to be on the safe side? Here's where the SEC gets the most blame.

People who are new to the issue often wonder why finders don't get licenses just to be on the safe side. Here's where the SEC comes in for the most blame. Its rules dictate that a broker is a broker; in other words, smalltime matchmakers fall under the same complex regulatory scheme as Merrill Lynch's stockbrokers. It's one-size-fits-all, and much of what's required, small-business advocates argue, is irrelevant and costly, such as business continuity plans and special financial statements. Most finders simply choose not to go through the hassle.

One proposal is a simplified licensing system to register the good guys and (perhaps) keep out the bad guys. Some state regulators are supportive: "If an individual is in a position to put businesses together with investors and is willing to undergo a background check, pay a fee, and put the state on notice, we in government should encourage that," says Texas's Crawford.

One licensed finder, who wished to remain unnamed, agrees. If the process were simpler "people would come out of the woodwork and realize it's easier to get registered than to try to hide," he says.

It sounds simple, but many believe that the SEC can't ease up on finders without reconsidering the whole dauntingly complex structure of broker-dealer regulation to make sure no loopholes are opened for Wall Street. Also, the agency's primary mission is investor protection. With a history of con artists using small companies as a base to defraud the public, anything that smacks of looser controls makes regulators squeamish.

But such reservations get the brushoff from those who see entrepreneurs as the true victims here. Some subscribe to the cynical view that the SEC simply finds the concerns of emerging companies less noteworthy than those of the nation's elite corporations; one advocate grumbles that some people at the agency "have not thought for five seconds about small business." Makens says, more charitably, that the SEC is going through a "learning process."

Still, stunned by the chorus of small-business groups, state regulators and lawyers urging action on this sleeper issue (which has dominated the SEC's own small-business summit two years in a row), the agency may be ready to take action. Despite the inherent risks, finders are only likely to gain in popularity. The cash crunch, felt hardest in less metropolitan parts of the country, will surely see to that. Matchmaking services are needed in his region, says Mark Butterworth, manager of Ohio TechAngel Fund in Columbus, because "the [financing] options in the Midwest for tech entrepreneurs are pretty sparse."

An SEC spokesman says only that the agency "welcomes input from the public" concerning finders. But unless the need for start-up capital magically disappears, the resolution of the issue amounts to nothing less than a major test of the SEC's responsiveness to small business.