You may have had a friend try to introduce you to a company looking for investors for a private offering or a PIPE transaction (private investment in public equity).  Maybe you were even the person doing the introducing.  If so, the issuer might have promised to pay you a commission.  What happens when your prospect invests and the company does not pay?  Based on the way New York courts have interpreted the law, the company could be entirely in the right, and you could be subject to a claim of violation of the securities laws.

A person acting as a “broker” must be with the Financial Industry Regulatory Authority (“FINRA”).  While somewhat underutilized defense, FLLC and other security litigators have successfully defended issuers against claims for commissions because the plaintiff acted as an unregistered “broker.”  A person acting as a “finder,” however, does not act as a “broker” and need not be registered.  While also infrequently litigated, FLLC and other lawyers have succeeded in getting clients paid because they fell under the “finder’s exemption.”

The Securities Exchange Act of 1934 (the “Exchange Act”) is part of an extensive series of legislation designed “to protect investors … through regulation of transactions upon securities exchanges and in over-the-counter markets.”  Section 15 of the Exchange Actspecifically prohibits an unregistered person from acting as a “broker,” while section 29(b) of the Exchange Act makes void any contract that violates the Exchange Act.  The question then is “who is a broker?”  The Exchange Act defines a “broker” as “any person engaged in the business of effecting transactions in securities for the accounts of others.”  Unhelpfully, the Exchange Act does not define either “effecting transactions” or “engaged in the business.”  Knowing whether you are engaged in the business of effecting transactions is incredibly important, because if you are instead acting as a “finder,” you may be entitled to payment.  Courts have held that distinguishing between a broker and finder “involves an evaluation of the quality and quantity of services rendered.”  A finder “is required to introduce and bring the parties together, without any obligation or power to negotiate the transaction, in order to earn the finder’s fee.”  A broker, on the other hand, will perform that same introduction, but “ordinarily also bring the parties to an agreement.”

Courts have generally agreed that “merely bringing together the parties to transactions, even those involving the purchase and sale of securities, is not enough” to find a person acted as a broker.  Rather, the person must have been involved at “key points in the chain of distribution,” such as participating in the negotiation, analyzing the issuer’s financial needs, discussing the details of the transaction and recommending an investment.  A finder generally has far less involvement in the ultimate transaction quantitatively and qualitatively than a broker.  Each case is different and courts in New York and elsewhere will take an in-depth look at the facts to determine whether a person was a broker or a finder.  Beyond the scope here, but further complicating matters, each state has its own “Blue Sky Law” regulating securities that could come into play.

Unfortunately, the Exchange Act’s vague definitions create fact issues and uncertainty for finders, brokers and issuers alike.  While the safest course is registration for a broker, the cost and administrative burden makes registration untenable for most.  If you have questions about the broker/finder distinction or the right to payment for broker/finder services, please do not hesitate to contact us.


This post has musings from recent briefing we did representing a broker seeking a commission for a real estate transaction.  In New York, the default rule for real estate brokers is that they earn their commission when they produce a buyer who is “ready, willing and able” to purchase at the terms set by the seller.  This is a default rule because the seller (or lessor) and broker can, and often do, agree on different terms concerning a commission.  Perhaps most common, the seller and broker agree that a commission is only due if and when the seller actually closes on the sale of the property to the buyer produced by the broker – with the broker getting paid at the closing table out of the sale proceeds.

As with many other commercial transactions, disputes arise when the parties do not reach clear, express agreement of terms, preferably in writing.  Assume there is no agreement, the broker markets the property and finds a willing buyer, but the seller changes his mind and does not sell.  A broker can successfully sue for its commission if it proves the broker was the “procuring cause” of the transaction.  One appellate court (in a case we litigated) set the standard for procuring cause, holding the broker’s efforts “must be a direct and proximate link, as distinguished from one that is indirect and remote,” between the introduction of the property and the consummation of the deal.  In other words, a broker must do more than merely introduce a buyer to a property, but the broker does not necessarily have to negotiate the deal’s final terms or attend the closing.

Ordinarily, a buyer that does not retain the broker is not responsible for a seller’s commission.  Where a buyer or lessee retains a broker for a property search or other services relating to the deal, even where the same broker represents the seller, the buyer may have liability concerning the commission.  In many transactions, the broker representing a buyer or lessee will get compensated by the seller or lessor upon the closing of a transaction.  Most times, the seller pays and there is no dispute.  When the broker does not get paid, whether because the purchaser does not protect the broker by ensuring a provision for payment of commission in the contract or decides not to purchase, a dispute can arise.  In addition to the possibly relevant issue of whether the broker was the “procuring cause” of the deal, a court might also examine the purchaser’s conduct.  In cases without an express agreement between a buyer and its broker, New York courts have held that a buyer can still have an enforceable “implied” contract with its broker.

Over fifty years ago in Duross Co. v. Evans, 22 A.D.2d 573, 257 N.Y.S.2d 674 (1st Dep’t 1965), the court recognized an implied contract claim.  The broker found the buyer a suitable parcel, and the buyer authorized the broker to submit an offer that the seller accepted.  The seller issued a contract of sale providing for the seller to pay the commission upon closing, but the buyer refused to sign the contract.  The Court held the broker stated a valid claim that the buyer had an implied agreement to purchase, thus allowing the broker to get paid a commission, and the buyer breached by refusing to enter into the contract.  Another cautionary tale about the importance of a purchaser having a clear written agreement with its broker is found in Williams Real Estate Co. v. Viking Penguin, Inc., 228 A.D.2d 233, 644 N.Y.S.2d 19 (1st Dep’t 1996), the court recognized a broker’s claim that it had an oral exclusive brokerage agreement by which the lessee agreed to protect the broker.  The court upheld a claim that the lessee breached the oral agreement by entering into the lease with a different broker.