Placement agents are most often compensated through fee arrangements based on the amount of money raised and supported by the fund or company they are actively representing.
Within the context of fund managers, placement agents can serve several functions:
Raise investor commitments to new private equity funds - which might include targeting specific investor all the way down to a full service (advisory and marketing services)
Placement Agents: Part I: What Are They, What Do They Do and on What Terms?
Raising money for private companies can be a frustrating and stressful experience. Without the kind of access to the investing public that a public company enjoys, and given the kinds of restrictions on who can invest in many types of private placements, finding appropriate investors can be a daunting proposition. It can also be expensive, not only in terms of money but especially in terms of the time and effort required, time that you and your employees might otherwise put towards finding new clients, improving business processes, or creating new products.
For those who want assistance in the fundraising process, one option is to engage a registered broker-dealer to act as a placement agent for the offering. This blog will discuss the role of placement agents in the fundraising process.
What is a placement agent and what can they do?
Essentially, a placement agent is a registered broker-dealer (a “BD”) that assists the company offering the securities (the “issuer”) by connecting it with qualified investors who may be interested in purchasing the issuer’s securities. one of the primary benefits of using a placement agent is the ability to quickly gain access to potential investors with whom the placement agent enjoys a pre-existing relationship. Out of its long list of qualified investors, the agent can help identify those potential investors who are likely to be interested in this particular investment opportunity. This ability to identify qualified potential investors and target those most likely to invest improves the chances that the company will be successful in raising the levels of capital it is seeking. In addition, reliance on the agent’s pre-existing relationships with investors helps the issuer avoid violating restrictions on general solicitation and advertising if conducting Rule 506(b) private placement.
A related function of the placement agent in a private placement is to assist the issuer in preparing and distributing its private placement memorandum (a “PPM”) to potential investors. The PPM is an informational document provided to potential investors, and fulfills a similar function as does a prospectus in a registered public offering (this document is sometimes also referred to as an “offering circular” or “offering memorandum.”) The PPM will include material information about the company, such as its history and description of the company’s business, financial disclosures, and investing risks. Like a prospectus, the PPM serves a dual role as both a marketing document and a liability reduction document, and is thus of tremendous importance in the private placement. Having the assistance of a reputable placement agent in drafting this document can be of great benefit for the company.
Related to assisting the company in preparing the PPM, the placement agent can also provide assistance more generally with its marketing and capital-raising efforts. For example, the placement agent can provide assistance in preparing and putting on investor “road shows”, drafting communications like press releases or investor updates, and similar activities. Not all BDs acting as placement agents will offer the same services, of course, and the specific services required by an issuer for any single capital raise will vary; the particulars of any agreement between the issuer and its placement agent can be negotiated and developed when the issuer decides to contract with the placement agent for its services. on that note, I will next discuss the issue of placement agent compensation, as well as some of the common areas of negotiation which tend to arise when negotiating the contract for placement agent services (usually called the “placement agency agreement” or “engagement letter.”) Often, placement agents will have pre-drafted forms of these agreements. Some terms, such as indemnification and liability limitations, are generally non-negotiable, whereas terms like compensation, exclusivity, and the length of the tail provision, are negotiated based on deal specifics.
Placement Agent Compensation
By far the most common form of compensation a BD serving as placement agent will take is in the form of commissions, much like an underwriter in a registered public offering. The commission percentage charged on any particular deal is negotiable, naturally, but in general will range from around 7% at the lower end to about 15% at the higher end. This commission is charged on the total amount raised, which depends in turn on how many shares the agent can place with investors. For example, if the placement agent succeeds in placing 100,000 shares at $1 per share with its investors, and its commission is 8%, its compensation will be $8,000. Some common variations to a static percentage rate might include a tiered structure (for example, the agent might earn 7% for the first 100,000 shares placed, 10% for the next 200,000, etc.) or a rate that depends on the overall success of the private placement (e.g. the BD receives 9% if the placement raises $1 million or less, but 11% if it raises more than that.) Again, commission compensation will be a basic negotiating point in any placement agency agreement.
In addition to commission fees, placement agents will sometimes request equity compensation, most often in the form of options or warrants to purchase shares at a particular price. Outright allocations of shares is less common, although not unheard of (sometimes, for example, when the capital raise has been particularly successful, the company will give the BD a small number of shares in the form of a “success fee,” although contractually this is often left to the company’s discretion.)
If the private placement is to take place over an extended period of time, and particularly if the placement agent will also be providing some of the more general services alluded to in the above section, compensation may also include an initial retainer fee or monthly service fees. Like commission-based compensation, these amounts are negotiable. If these fees are included as compensation, one possibility, for example, might be to structure the contract such that these fees will be offset against commission compensation.
“Best Efforts” Offerings
Placement agents, like underwriters in a public offering, are primarily compensated based on the commission model. A major difference between the two is that underwriters in public offerings are almost always engaged with on a “firm commitment” basis, whereas placement agents in private placements almost always work on a “best efforts” basis. Simply put, this means that the placement agent does not guarantee that it will be successful in placing all of the issuer’s shares, or even a particular number of shares, and it does not agree to purchase itself any shares it cannot place with investors. (In a “firm commitment” underwriting, on the other hand, the underwriter promises that it will purchase for its own account any shares it cannot place with investors.) Instead, it only promises to use its “best efforts” to place as many shares as it can (ideally, of course, it will place all of them, because the more it can place, the greater its commission compensation.)
Exclusivity Issuers may wish to engage the services of several placement agents in a single offering (similar to using an underwriting “syndicate” for a public offering.) This raises the issue of exclusivity. Simply put, if an issuer engages with a placement agent on an exclusive basis, the company is agreeing that it will not use any other placement agent for that offering. If the agreement is non-exclusive, the company may use other placement agents for that offering. In that case, it is imperative to maintain accurate records as to which agents are responsible for which investors. Generally, if multiple placement agents are used, the company will likely want to engage each on roughly equal terms (particularly in terms of commission rates), primarily to avoid engendering any bad blood. Neither exclusivity nor non-exclusivity is objectively better than the other, and will depend, as with other aspects of the agreement, on the particulars of the offering.
The Tail Provision
Often, the agreements between issuer and placement agent are terminable by either party with or without cause, provided sufficient notice is provided. Because of this, placement agent will virtually always insist on what is known as a “tail” provision that says that even if its services are terminated prior to the closing of the offering, the placement agent will be entitled to compensation if an offering takes place within a specified time period. The amount of compensation is generally what the agent would have been entitled to if its services had not been terminated (i.e. if the company sells to investors originally introduced to it by the placement agent, it will be entitled to its commission compensation for those investors.) The purpose of this provision is, essentially, to protect the agent from an unscrupulous issuer exploiting its connections with investors but terminating the relationship prior to the actual offering so as to avoid being required to pay the placement agent its commission fees. It is virtually impossible to eliminate the tail provision from the placement agent agreement, but the particulars, such as the length of the tail or what counts as a successful closing, may be amenable to negotiation to some extent (for example, if the issuer cancels one offering, then launches another one within the time frame and makes an offer to an investor originally introduced in the prior, canceled offering by the terminated placement agent, is it still entitled to compensation?) As a practical matter, the company will prefer the shortest possible tail, while the placement agent will want one as long as possible. In my opinion, any tail of over 1 year is entirely unreasonable, and in no event should an issuer agree to an open-ended tail, which is not unheard of in agreements drafted by placement agents.)
Additional Provisions
Terms related to compensation, exclusivity, and the tail provision are commonly negotiated terms, but they are of course not the only important provisions of the placement agent agreement. Representations and warranties are very important as well; the placement agent will want to ensure that any information the company is providing to it is accurate, while the company will want to make sure that the placement agent is legally permitted to provide the services it is offering (i.e. that it is duly registered with the SEC, FINRA, and any applicable state agencies), that it does not have any “bad actors” participating on the deal, that it has a pre-existing relationship with any investors it is contacting in connection with the deal (and that it certifies to the company that such investors are qualified to participate in the offering), etc.
In summary, with regards to the placement agency agreement and its terms, the company should be sure to make use of the services of an experienced attorney.
In the next blog, we will discuss whether issuers should use placement agents, and how to choose the right one.
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
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How Do Private Equity Placement Agents Get Paid?
by Felicia Dye
A placement agent must be a registered broker-dealer.
Who you know is important if you want to be a private equity placement agent. It's a job well suited for people who can make contact with a lot of individuals who have large sums of money to invest. Private equity funds need capital to survive, and many rely on agents to help them find it. Since fundraising is vital, private equity funds generally compensate successful agents very well.
In the simplest scenario, a placement agent will help a private equity fund attract investments and then take a percentage of the money she brings in. Traditionally, placement agents' fees ranged from 2 percent to 2.5 percent, according to Probitas Partners, a private equity fund placement agent and advisory firm.
Where Credit Is Due
For the percentage-based compensation system to work properly, the private equity fund needs to determine which investments a placement agent attracted. Some funds ask the agents to submit a list of investors they plan to target beforehand, according to the Philadelphia law firm Morgan, Lewis & Bockius LLP. Other funds outline criteria that must be met if a placement agent is to receive credit. For example, the placement agent may be required to have a specific amount of contact with each investor.
The private equity market is changing, and so are the needs of equity funds. Some private equity fund mangers hire placement agents to help them establish their funds from the initial stages. In these instances, agents usually provide an array of services, such as marketing, drafting presentations and helping select qualified fund personnel to present them. Some placement agents even help outline the terms for operating the fund. As placement agents are assuming more roles, standard fee-based compensation is becoming rare, explains Probitas Partners.
New Payment Structures
Complex payment structures are becoming more common in the private equity placement field. Some placement agents divide their services into categories; they charge flat rates for advisory services and take an additional percentage of the capital they attract for their fundraising services. Some agents have incentive-based payment agreements, earning a higher percentage of the pie as they attract more money.
Payment Details
Private equity placement agents are paid once for each investment agreement. Sometimes payday doesn't come until the fund closes. That way, the fund can ensure it has enough cash to operate, according to Morgan, Lewis & Bockius. If a placement agent is paid beforehand and an investor does not meet her obligations, some funds will request a refund from the agent, the law firm says. Payments are usually in cash, but some agents also request that a portion of their compensation be converted into an investment in the fund they're representing, according to Probitas Partners.
Placement Agent Fee. The Purchasers acknowledge that the Company intends to pay to Craig-Hallum Capital Group LLC, in its capacity as the placement agent for the Offering (the "Placement Agent"), a fee in respect of the sale of Securities to the Purchasers. The Company shall indemnify and hold harmless the Purchasers from and against all fees, commissions, or other payments owing by the Company to the Placement Agent or any other persons from or acting on behalf of the Company hereunder.
Placement Agent Fee. The Purchasers acknowledge that the Company has engaged Primary Capital, LLC as the exclusive placement agent (the "Placement Agent") in connection with the offering of the Notes and, as consideration for its services, has agreed to pay to the Placement Agent at the Closing a commission equal to five percent (5%) of the gross proceeds received by the Company from the sale of Notes to the Purchasers. In addition, upon conversion of the Notes into Conversion Securities, the Company shall issue to the Placement Agent or its designees warrants to purchase that number of Conversion Securities equal to 5% of the number of Conversion Securities issued upon such conversion, exercisable at a price per Conversion Security equal to the price at which the Notes were so converted. Upon repayment or redemption of the Notes as provided therein, the Company shall issue to the Placement Agent or its designees warrants to purchase that number of shares of the Company's common stock (the "Common Stock") equal to 5% of the aggregate number of shares of Common Stock underlying the Warrants, exercisable at the same price at which the Warrants are exercisable. The warrants issuable to the Placement Agent pursuant to this Section 1.2 shall be in substantially the same form as Exhibit B hereto.
Placement Agent Fee. The Company has agreed to pay Placement Agent a placement fee comprised of ten percent (10%) in cash on gross proceeds received by the Escrow Agent and five percent (5%) in shares of the Company's common stock as determined by the number of Units sold to any Investor referred by Placement Agent in connection with this offering.
Placement Agent Fee. The Investors acknowledge that one or more investment banks may be retained by the Company to serve as placement agents for the Shares. The Company has agreed to pay the placement agents cash commissions ranging from 2% to 8% of the aggregate purchase price paid by each purchaser of Shares depending on whether they are prior investors or new investors that are introduced to the Company by such investment bank. Further, the Company may issue to the investment banks warrants to purchase shares of the Companys Common Stock ranging from 0% to 8% of the Shares purchased by such investors at a price equal to 110% to 125% of the market price for the Common Stock.
Placement Agent Fee. The Company shall pay the Placement Agent an amount, in cash, equal to 4% of the Purchase Price on the Closing Date. The Company shall issue the Placement Agent _______ shares of the Company's Common Stock and a Warrant convertible into ___________ shares of the Company's Common Stock.
Placement Agent Fee. The Placement Agent Fee means a non-refundable fee payable by the Company to Halcyon Cabot Partners, Ltd. (the Placement Agent) in the amount of 5% of the amount that is actually funded by the Investor pursuant to all Closings. The Placement Agent Fee shall be paid to the Placement Agent with each Closing based on the amount funded in such Closing, by wire transfer of immediately available funds, in an amount equal to 5% of the applicable Closing Price.
Placement Agent Fee. The Purchasers acknowledge that the Company intends to pay to [____________], in its capacity as the placement agent for the Offering (the "Placement Agent"), a fee in respect of the sale of Securities to any Purchaser. The Company shall indemnify and hold harmless the Purchasers from and against all fees, commissions, or other payments owing by the Company to the Placement Agent or any other persons from or acting on behalf of the Company hereunder.
Placement Agent Fee. The Investor acknowledges that the Company intends to pay the Placement Agent a fee in respect of the sale of Units to the Investor.
Appears in 1 contract
Placement Agent Fee. Placement Agent in cash by wire transfer in immediately available funds to an account or accounts designated by the Placement Agent an amount (the "Placement Fee") equal to eight percent (8%) of the aggregate gross proceeds received by the Company from the sale of the Securities at the closing of the Offering (the "Closing" and the date on which the Closing occurs, the "Closing Date"); and the Company shall issue to the Placement Agent or its designees at the Closing one five-year warrant to purchase such number of shares equal to 5% of the shares of Common Stock included in the Units (as defined below) sold in this Offering at an exercise price of $0.7375 (125% of the price per Unit) (the "Placement Agent Warrants" and together with the shares of Common Stock underlying the Placement Agent Warrants, the "Placement Agent Securities").
Raising money for private companies can be a frustrating and stressful experience. Without the kind of access to the investing public that a public company enjoys, and given the kinds of restrictions on who can invest in many types of private placements, finding appropriate investors can be a daunting proposition. It can also be expensive, not only in terms of money but especially in terms of the time and effort required, time that you and your employees might otherwise put towards finding new clients, improving business processes, or creating new products. 
