If you are an introducer or intermediary, your contacts with investors may well be your most valuable asset. You may have spent years developing those relationships through networking, client entertaining and travel. You provide a very valuable service in filtering opportunities and connecting those investors with suitable projects.
At LCN Legal, we are often involved in projects where introducers have a critical role. Many of those projects involve very significant sums, and it is natural that the introducers should be rewarded for their efforts. Often this reward is in the form of a commission, introduction fee or fundraising fee, which is payable only if the project goes ahead.
From our perspective as English lawyers, we often come across situations where introducers may not receive the reward they were expecting, or may expose themselves to unexpected liabilities. Here is a list of the  most costly mistakes that we see.
1. Missing the opportunity to sign up an introduction fee agreement
Timing is crucial. If you don’t have a clear contractual entitlement to receive fees before you make the introduction – or at least a signed non-disclosure and non-circumvention agreement, you may just be relying on the goodwill of the parties to pay you a fee.
2. Not taking control over the terms of your introduction fee agreement
It is a common misconception that letting others provide their standard form agreements will save you time and money. However, the best way of securing your entitlement to fees is to take control over the terms of your fee agreement. Another party’s contract will be unlikely to protect your interests. If you don’t have a suitable contract in place, you may not receive the fee you should: for example, does the contract cover you if the investor is offered an opportunity to buy, but then agrees to make a loan instead? Or if the investor makes an investment in a different project? Or if the purchase price is payable in instalments, or in non-cash consideration? Or if the investment is not made by the investor you have introduced, but by a related party? All these situations can be addressed in black and white if you have the right contract in place.
3. Signing a contract with the wrong person
The best contract in the world will not help you if you have signed it with the wrong person. For example, if you sign an introduction agreement with another intermediary in a chain of intermediaries, your entitlement to get paid will only be as strong as the weakest link in that chain. The strength of any given link depends on two factors: the terms of the relevant contract, and the financial standing of the paying party. If your contract is with a company which has no assets, and only an indirect connection with the project, your fees are at risk. All this means that you need to understand the full picture, and choose your counterparty to the contract wisely.
4. Taking a fee from both sides, without the express consent of both parties
In principle, it is acceptable to receive a fee from the buyer and the seller in a particular project. However, when you start to act as agent for one party, various implied legal obligations can arise. This can include a duty not to make a secret profit from that particular role. This can mean that if you haven’t made it very clear to the first party that you will receive and retain a fee from someone else, you may have a duty to pay over that fee to the first party.
5. Failing to take VAT into account
Unless your commission agreement expressly says that VAT is charged in addition, the legal interpretation under English law will usually be that whatever fee you have quoted includes VAT. This may mean that if you are subject to VAT, you bear that cost (currently 20%).
6. Committing a criminal offence by carrying on a regulated activity under financial services legislation
Provided you are only making introductions for the purposes of investing directly in UK property and you are not offering or arranging an investment in shares or any other security or financial products, you should not have to worry about infringing financial services regulation in the UK. However, if the project involves selling or issuing shares, loan notes, participations in a collective investment scheme or some other form of investment, you need to consider your position very carefully, and make sure you are acting within the relevant rules. The UK’s Financial Conduct Authority regularly prosecutes offenders, and other parties may make a complaint, particularly if a project does not produce the expected returns.
7. Not understanding your investor
We have put this last because it has the least to do with legal considerations, but really it’s the most fundamental point. More often than not, failing to ask questions about the investor will mean that you don’t receive a fee because the investment project doesn’t go ahead. Some of the basic questions to ask include:
- What kind of investment and return does the investor want?
- What are the investor’s motivations and timescales for investing? Are there any deadlines?
- Are the relevant funds already available in the relevant country? If not, when will they be available?
- What experience does the investor have of similar projects in the relevant country?
- Does the investor already have a team available in the relevant country to negotiate, manage and monitor the project?
- What are the investor’s tax circumstances? What tax advice has the investor already received?
- What is the investor’s background? What information can be provided to reassure sellers / investees that the investor is a reputable and reliable partner?
- What else does the investor bring to the project, apart from cash? This may include access to bank debt, development skills, marketing skills and so on.
If you do not already have a suitable non-disclosure and non-circumvention agreement, contact us for more information.
If you would like help creating a tailored template introduction agreement or non-disclosure and non-circumvention agreement, please call us on +44 20 3286 8868 or email us at firstname.lastname@example.org.
You may also be interested in the following free resources: