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.


It is not uncommon for a person to act as a finder and receive compensation for presenting a business opportunity to a businessperson.  The two might agree the finder will receive a cash fee or perhaps a percentage of revenue derived from the opportunity.  Sounds great!  The businessperson has a chance to make money from an opportunity she would not have otherwise had, and the finder is compensated for passing along the opportunity.  And it is great – as long as the two parties write down their agreement that the finder will be compensated.

Many people might know that a contract to sell a house in New York is not enforceable unless a signed writing memorializes the terms.  Fewer people likely realize that the same New York statute requires a writing to enforce most agreements for compensation in connection with negotiating or finding a business opportunity.  The New York Statute of Frauds requires a writing to pay a finder for negotiating “the purchase, sale, exchange, renting or leasing … of a business opportunity, business, its good will, inventory, fixtures, or an interest” in a business.  The Statute of Frauds even applies where a person is not directly negotiating, but uses her “connections, ability and knowledge” to arrange meetings between appropriate people and procure contracts.

Acting as a finder of a business opportunity without a written agreement can lead to a situation where the finder’s efforts go entirely unrewarded, while the businessperson legally reaps and keeps all the benefits.  Recent New York plaintiffs learned this lesson the hard way.  In Vanacore v. Vanco Sales LLC, No. 16-CV-1969 (CS), 2017 WL 2790549 (S.D.N.Y. Jun. 27, 2017), the plaintiff presented his cousin with a potential contract to deliver pharmaceutical drugs for a major drug company.  The plaintiff apparently lacked the capital to start the business.  The parties allegedly orally agreed that the cousin would fund the capital to set up the business and pay plaintiff a commission of 15% of revenues for finding the deal and putting it together.  The cousin paid the plaintiff a total of $300,000 over 12 years and then stopped.  Plaintiff sued and defendant moved to dismiss the complaint, arguing that the New York Statute of Frauds bars the alleged oral agreement to pay plaintiff for his role in finding the delivery contract.

The court agreed and dismissed the plaintiff’s claim as barred by the Statute of Frauds.  The court found the plaintiff alleged he acted only as a “finder” by negotiating the business opportunity and securing a delivery contract, while the cousin put up the capital and managed the business.  Without a writing, the Statute of Frauds voided the alleged oral agreement to compensate plaintiff for his efforts as a finder.

If you have an issue with an agreement for compensation relating to finding or sharing a business opportunity, please do not hesitate to contact us.