Few entrepreneurs seeking equity investments have enough personal contacts with people that can offer adequate and available money. For those who don’t, one option is to engage an intermediary or “placement agent” to assist them in the process of finding potential investors. A placement agent usually refers to a person or firm that is a registered broker-dealer, but sometimes also includes “finders.”
Broker-dealers are regulated professionals or firms that have passed a series of exams and have gone through a lengthy registration process that includes interviews. Finders, on the other hand, are not generally regulated. According to federal law, a broker-dealer is “any person engaged in the business of effecting transactions in securities for the account of others.”
For purposes of this article, the key language is “in the business of effecting transactions.” A finder is someone not in “the business of effecting transactions.” Rather, finders infrequently bring investors and companies together, but that’s all they can do. By law, a finder is not permitted to pitch for the company, develop deal terms, or negotiate for or represent the investor or the company.
There are likely many finders out there who actually perform the services of a broker-dealer, but have failed to register as one because of either ignorance or the time and cost that it takes to become registered. However, it is a violation of federal and most state securities laws to fail to register if a person or firm is engaging in conduct that constitutes broker-dealer activities. A violation of one of those laws can bring fines, investment rescission, penalties, and headaches.
Moreover, there are regulatory issues of giving transaction-based compensation to finders, which often times is exactly what the company and finder want to do.
Because of these and other regulatory issues and various limitations in using finders. However, there are many more finders that are willing to work with early-stage companies than there are broker-dealers willing to do so.
You may ask, “how does one find a placement agent?” Typically, on the internet or they find you. However, if that hasn’t happened, entrepreneurs can talk with their lawyers, accountants, or other entrepreneurs about their experiences with various placement agents in their area.
When selecting a placement agent, there are many things to consider. Probably the most important consideration is who are the LP Investors they represent. By using a placement agent, you are putting a lot of faith in their distribution channels. Below are some other considerations:
• Experience generally as a placement agent.
• Experience and success with similar industries raising comparable amounts of money.
• Distribution list of vast LP Investors.
• Knowledge and experience with LP Investors that will be a fit for your Fund and invest in Emerging Managers.
• For finders, the impact of using a finder on state Blue Sky exemptions, and potential legal issues with using the particular finder.
• Pre-existing substantive relationships with prospective accredited investors.
Contracts with placement agents vary significantly. Below is a list of areas that are commonly negotiated in arrangements with placement agents:
• Compensation amount and type (e.g., retainer/monthly fee versus a transaction-based fee).
• Events that give rise to compensation.
• Additional services.
• Representations, warranties, and covenants.
• Use of affiliates to assist in process.
• Ability to terminate and effect of termination.
Once a company decides to engage a placement agent, finding the right one(s) under the right terms are essential. The placement agent may not only affect the success of your offering, but the placement agent may also affect (positively or negatively) the reputation of you and your company with the correct Branding, and could possibly bind you to a long-term contract, comprehensive, and expensive set of services. REO Capital has No Long Term Contract and will not bind you to an expensive set of services. REO Capital’s branding is vast across RIA firms, Wealth Management firms, Single Family Offices, Multi-Family Offices, Investment Consultants, Fund of funds, Corporate pensions, Insurance companies, Foundations and Endowments which will expose your fund to many Institutional Investors.
REO Capital – Is unique and different in many ways. So talk to us after you talked with other Placement Agents or Finders.