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.