At this point, having discussed the services a placement agent can provide, the kinds of compensation used, and other important terms to keep an eye on when negotiating for the services of a placement agent, there is still the threshold matter of determining whether using placement agents makes sense (and when it doesn’t) in the first place. In addition, how to decide which specific placement agent to use?
The first thing to keep in mind is that placement agents are much more common in later-stage financing rounds. Placement agents are almost never used in seed rounds or early-stage financing. One reason for this is that the universe of potential early-round investors (e.g., VC firms and funds) is much smaller and, for lack of a better word, self-contained. In addition, pertinent information, such as what sorts of companies particular VCs invest in and at what dollar amounts, is often publicly available to a much greater extent than for later-stage investors. On a practical level, companies in the early fundraising stages may also be less willing or able to pay the significant commissions demanded by placement agents for their services. This does not mean, of course, that it is never helpful or necessary to use a placement agent in an early-stage fundraising round, but they are used much more commonly—and are in general much more helpful—in later-stage rounds by companies with some kind of established track record.
That being said, if an issuer feels that it can be successful in raising capital without employing the services of a placement agent (for example, perhaps it has only a few major investors who are willing to fully finance a later round), then there is nothing which requires that a placement agent be used. Any money not paid out to placement agents as commissions in a private placement is money the company retains for its own use.
Sometimes, however, using a placement agent is necessary or helpful. For example, if the company is contemplating multiple rounds of private placements over an extended period of time, hiring a placement agent that can introduce the company to a significant number of potential investors (and who may be willing to invest in multiple financing rounds) could be very beneficial. Obviously, if the company has had difficulty raising capital in the past or is facing low interest in the present, hiring a placement agent may be helpful. If conditions in the broader economy are difficult, the services of a placement agent may also be necessary. In the end, the decision whether to hire a placement agent will depend on the circumstances.
If you are considering using a placement agent, you will want to do your homework, as with any potential partner. From a legal standpoint, the most crucial requirement is that you only use a registered BD as a placement agent. This is because any BD acting as a placement agent will be deemed to be “participating” in the offering, and according to both SEC and FINRA regulations, only registered BDs are allowed to so participate. A company should be particularly wary of so-called “finders”, which are not registered BDs. A “finder” may offer to introduce companies to investors, but nothing else—they do no assist with the PPM, do not talk to investors on behalf of the company, etc. It is very important to keep in mind, however, that both the SEC and FINRA define “participation” very, very broadly, and if they find that non-registered persons have participated in the offering, the penalties can be severe, including, for example, “rescission” (i.e. returning any money accepted back to investors).
After making sure that the placement agent you use is a duly-registered BD, there are additional considerations to keep in mind. Some placement agents, for example, may specialize in certain kinds of companies (e.g. software companies or pharmaceutical companies), certain kinds of offerings or transactions (e.g. debt or equity offerings), certain kinds of investors, or certain regions (whether within the United States or with overseas investors). You should ask potential placement agents to put you in contact with other companies who have used their services in the past (though note that the particular terms, such as compensation, are likely covered by confidentiality). Information, as always, is power, and the more information your company can obtain about your potential placement agent partner, the more confident you can be that the placement agent you are partnering with will help you achieve your company’s goals.
This article is not a legal advice, and was written for general informational purposes only. If you have questions or comments about the article or are interested in learning more about this topic, feel free to contact its author, Arina Shulga. Ms. Shulga is the founder of Shulga Law Firm, P.C., a New York-based boutique law firm specializing in advising individual and corporate clients on aspects of corporate, securities, and intellectual property law.