What Does a Placement Agent Bring to Investors and Issuers
In order to fully understand recent legislation and the regulation changes made, let’s first explain the role and responsibilities of a placement agent:
Quite simply, a placement agent is a registered broker-dealer who assists a company (the issuer) offering the securities by connecting it with qualified investors who may be interested in purchasing the issuer’s securities.
This seems straightforward, doesn’t it? However, there is a risk in operating a business if the placement agent is an independent broker-dealer, the business is typically smaller and, therefore, more prone to investigation or examination. Because of recent legislation and the “Pay to Play” rules put in force, this is a good time to consider what role a placement agent brings to investors and issuers and how the role remains relevant and necessary in a strict regulatory environment.
The Role and Responsibilities of a Placement Agent
- A placement agent is a registered broker-dealer.
- A placement agent assists an issuer company offering securities
- A placement agent assists qualified investors interested in purchasing the issuer’s securities
- A placement agent is actively involved in the fundraising process
- A placement agent assists with the preparation of marketing materials prepares the marketing strategy, and may, on occasion, assume the role of negotiator.
The Processes of a Placement Agent
- As a primary function, the placement agent connects with potential investors with whom the placement agent has a pre-existing relationship.
- Typically holding a long list of potential investors, the placement agent determines those investors most likely to be interested in the purchase of the issuer’s securities.
- An important aspect of these processes is that the issuer is typically seeking a large amount of capital within a short timeframe.
- The placement agent contacts the investors who will most likely be interested in the purchase of securities, which raises the likelihood of a successful transaction and one completed in a timely manner.
- Because the placement agent has a prior relationship with the investor, the issuer can avoid violating restrictions on general solicitation and advertising if conducting Rule 60b(b) private placement.
- The placement agent prepares the private placement memorandum and distributes the document to potential investors. The private placement memorandum is an informational document that fulfills a role similar to that of a prospectus in a registered public offering. The private placement memorandum will include material information about the company, including the history, description of past and present business, financial disclosures, and potential investment risks.
- In addition to utilizing a private placement memorandum as a marketing or prospectus item, it is also considered a liability reduction document, as it outlines fully the role of each party and the part played in the process.
- During the process, the placement agent may assume duties in releasing press reports, drafting communications, and other activities.
In general terms, a placement agent walks with the issuer and investors to smooth the way toward a mutually-acceptable sales agreement. Not all placement agents will offer everything mentioned here; however, placement agents are experienced and adept at conducting processes as each situation requires.
The Compensation of a Placement Agent
- Compensation may be offered or negotiated in a number of formats, although the most common compensation is that of commissions.
- The commission percentage is negotiable and ranges from 7% to 15% of the total amount of capital raised.
- There are several variables to the commission package, and those are negotiated during the initial agreements.
The Advantages of Broker-Dealer Placement Agent Sponsorship
Because independent broker-dealers who assume the role of placement agents must be cautiously compliant with federal securities laws, securities licensing, and proper broker-dealer interaction, there are advantages that can be gained from independent broker-dealers who become sponsored by securities firms that are fully qualified to offer such sponsorships. The advantages for the broker-dealer may include:
- Support in transactions, outside business activities, compliance, and licensing requirements, including raising equity and debt, acquisition, divestiture, and M&A transactions.
- Interim and foreign finder activities require broker-dealer sponsorship.
- Bankers on the securities side raise equity and debt capital, execute upon business sale, M & A, advise on the buy and sell side, and offer deep relationships with multiple executives worldwide.
Other advantages for broker-dealers who work within a placement agent sponsorship are related to the business growth and long-term success of the independent dealer-broker. These may include an independent broker dealer business plan and other organizational tools the broker-dealer can glean from the sponsorship opportunity.
A placement agent brings solidity and mutually agreed-upon closure for issuers and those investors who purchase securities. There are multiple advantages to including a broker-dealer in such offerings, just as there are for the independent broker-dealer to engage in a sponsorship relationship with larger entities that can support and protect the role and responsibilities of a placement agent.
