Sofar Sounds has made a name, a culture and a thriving business for itself by staging “secret gigs and intimate concerts” featuring emerging artists for an invited, engaged audience.

Its model has been a rousing success, in terms of popularity and, presumably, profitability. Launched in London in 2009, Sofar has spread to four countries (the U.S., Canada and Spain in addition to the U.K.) and claims to hold hundreds of shows per month in over than 350 cities. The concerts are staged in non-traditional venues: offices, retail spaces or even people’s homes. Three or four artists play brief, often acoustic sets, and audiences, which usually average 60-70 people, are encouraged to be quiet, polite and attentive. Prospective audience members enter their city into the Sofar website, apply to purchase a ticket, and within a few days receive a link to buy tickets through the company’s system for $10-$25; the venue is disclosed a day or two before the performance, and the artists are not revealed until the audience actually arrives at the gig.

The Sofar stamp of approval provides its own form of curation. Performers aren’t advertised in advance so there’s no complication with official gigs; the artists receive just $100 (a small amount but one which, realistically, is more than many unknown artists make for a more conventional appearance), but are guaranteed an attentive, invested audience that is far more likely to buy merchandise and music than a disinterested one. And, not least, the events are staffed almost entirely by empowered but unpaid volunteers, who number in the thousands and are called “ambassadors” for a very good reason: It is illegal for a for-profit company to have a model as dependent on free labor as Sofar’s.

And Sofar is unequivocally a for-profit operation: It has done three investment rounds, and earlier this year announced another $25 million round from investors including Richard Branson and Union Square Ventures.

Therein lies the rub: As a thoroughly reported article published last month in the Talkhouse revealed, the company is under investigation by the Department of Labor for possible violations of its practices.

So what kind of structural revisions would the company have to make to operate in a more legally legitimate manner? That question opens up a nest of legal and ethical questions that have dogged Sofar from the start. Variety spoke at length with attorney James Sammataro, a partner at Pryor Cashman LLP who works extensively in the live-entertainment space.

“Sofar is a legitimate business — with a genius model!,” he says, “They have mastered the cost-side of the live stage business. They don’t pay the venue; they pay the performing artists a pittance – either $100 or barter (in the form of a professionally-produced video performance) – and there’s an all-volunteer staff.  They’re effectively monetizing a beatnik culture for millennials, cashing in on culture without doling out dollars. They’re selling a virtually cost-free experience.”

But despite the potential benefits for the artists in terms of exposure, merchandise and music sales and audience development, it’s clear that the money is overwhelmingly flowing in one direction.

“I’ve always been down on it, knowing how much funding the organization has raised and so little is passed on to the performers and the staff,” one manager of several indie acts tells Variety. “Yet, artists and music fans love the intimate performances.”

That conundrum — and the multitude of grey areas the company crosses into — is clearly addressed by the Talkhouse article, which was written by veteran musician John Colpitts (a.k.a. Oneida/ Man Forever drummer Kid Millions). He pointed out that artists may actually come out ahead, in terms of their fee as well as merch sales, by performing for a Sofar audience rather than a more conventional — and financially risky — gig setting.

“Have you ever played a Monday night in Memphis and been paid nothing?,” asks Colpitts, a veteran musician who has spent many weeks on the road during a 20-plus-year career, in the article. “In the months I’ve spent researching this story I have played shows in which I’ve made $0, $10, $50 and $250. If those shows were instead Sofar events where I performed solo, I would have made more money and potentially made some new fans. Sofar has solved a market inefficiency by getting thousands of people to pay real money to see virtual nobodies through the reputation of the Sofar brand.”

While several Sofar executives and staffers spoke to Colpitts on the record, the company has since gone into media lockdown since his article published: A rep contacted by Variety had no comment for this story, although a source close to the company confirms that Sofar is working with the Department of Labor in an effort to “resolve the situation”; a representative for the department confirmed to Variety that an investigation is under way but declined to provide any further details.

Taking Sofar’s side for the sake of argument, Sammataro points to the widespread use of volunteers in the live-entertainment business. “Free labor is not uncommon for festivals,” he stresses. “Nearly all of the biggest festivals avail themselves of volunteers, offering free admission, a free t-shirt, meal tokens, preferred camping spots and other comparable perks to volunteers, who are seemingly all too happy to trade their labor for the opportunity to attend an event they might otherwise not be able to afford.  Free labor is prevalent throughout the business.”

However, according to the New York State Department of Labor website, “A person may do volunteer work in a non-profit organization, if that organization is set up and operates strictly for charitable, educational or religious purposes. For-profit organizations may not use unpaid volunteers (who meet certain criteria) except for a short-term recreational or amusement event run by that organization.”

That definition could apply to once-per-year festivals, but not to a year-round for-profit business.

Sammataro acknowledges that Sofar’s volunteer-dependent business model “has labor implications” similar to those of intern laws, which became more complex in the wake of class-action lawsuits that arose earlier this decade after Fox Searchlight and others companies ended up settling and retroactively paying a number of previously unpaid interns who sued them over possible minimum wage and overtime standards. But he also points to organizations as far-ranging as motivational speaker Tony Robbins to the National Football League utilize volunteers in exchange for access, status or other perks.

“Is an adult’s willingness to devote five hours of their time really exploitation?,” he reasons. “It’s hard to ask the state to legislate how adults spend their time.”

However, an unnamed source at the New York State Department of Labor told Talkhouse that the Sofar model “is completely unlawful in every respect, the way the labor law is organized — all people that perform work are covered by the labor law. There is no such thing as volunteer work, intern work, or anything like that for a for-profit company. The company is out of compliance.”

Sammataro debunks claims that the artists are being exploited, pointing to decades of questionable pay-to-play practices in the concert business. “There’s a lot of shadiness in the industry, such as the ‘buy-on,’” in which musical acts pay to open for a bigger act, he says. “When you see a festival with disjointed lineups or really short, five- or 10-minute sets, that’s usually a buy-on.” He also points to multiple acts who pay for desirable opening spots on major tours — and even a company that brokers such deals, TourBuyOn.com — such as the Raskins, who reportedly paid $1 million for an opening spot on 2014 Motley Crue’s farewell tour (and later sued the group).

“With regard to Sofar, you could argue that the artist is making an investment,” he says. “It’s free word-of-mouth PR, there’s a much better chance of merch and music sales and streams, it’s more immersive and it’s a great experience that creates a special connection with a utopian community that people are invested in. You can’t put a price on it. And it’s great practice and experience for developing artists — would they rather play on the subway, or a curated Sofar ‘experience’?

“Personally, I’m not troubled by the artist relationship here, although it is a slippery slope,” he notes, adding, “and it might be in literal violation of state laws.” Sammataro suspects that Sofar may be quietly attempting to reach a behind-the-scenes arrangement with the Department of Labor, whereby volunteers can work a certain number of hours without the company being deemed to have run afoul of labor provisions in New York and other states. “There’s sufficient precedent in distinguishing between the type of activities that are permissible for ‘non-profits,’ but impermissible as to ‘for profit’ corporations,” he says. “Also, the issue goes beyond protecting volunteers, or the artists: There is a financial motive. At a certain point, the state and city are going to calculate the amount of revenue potentially lost in employment-related taxes from Sofar’s ‘volunteer only’ model — and with over 200 shows in New York City over three months [as the Sofar website showed for July, August and September], the lost revenue adds up.”

Indeed. And although many artists and “ambassadors” have sung Sofar’s praises and pledged that they don’t feel exploited by it, in a democracy, that’s not necessarily an individual’s decision. The question remains, can Sofar retrofit its business model to be in compliance with labor laws, or is it destined to join Napster and many other dearly departed great-idea-too-bad-it’s-illegal businesses? Time will tell — but any musicians or fans looking to experience Sofar would be advised to do so sooner than later.