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.