Private Equity/Venture Services

There are a lot of avenues worth exploring when you are trying to raise money for your company.  Placement agents and existing advisors are some of the options.

A placement agent is a person (likely a company) who has contacts with potential investors that may be interested in helping a company raise capital.  A placement agent's value is really in his or her rolodex, so you need to make sure your agent has contacts in the right places.  Using a placement agent could result in a larger capital raise and could decrease the amount of time you personally would have to devote to the fundraising process.

However, there are potential dangers in using a placement agent.  Many of these firms take the position that they are “finders” and therefore exempt from broker-dealer registration requirements.  Although it is possible for a consultant to be exempt from such requirements, as a practical matter the limitations on what can be done as a finder before “crossing the line” into the world of broker-dealer registration are so stringent as to make finders mere bystanders in the sales process who offer nothing more than an introduction and do not participate in any negotiations or make any recommendations.

Further, a finder will generally expect a contingent fee based upon a percentage of the amount invested, but the SEC has allowed payment of those kinds of fees only in unique circumstances involving finders who are involved in solely introductory services in an isolated transaction and who have never before been engaged in any other securities offerings.  For this reason, payment of a contingent fee measured as a percentage of investment capital raised is problematic in the case of most finders; payment of a non-contingent fee for finders' services is the safe option.

For the above reasons, most “finders” are (if their activities were ever challenged) likely to be considered unregistered broker-dealers, a conclusion that could result in liability not only for the finders themselves but also for the companies that hire or contract with them.  Involvement of a finder could put a company in violation of federal or state securities law and could entitle investors to get their money back from the company or its controlling persons.

The best, and only safe, advice for companies seeking to raise capital using a finder or placement agent is to avoid using the services of sales organizations that are not already registered as broker-dealers in all required jurisdictions.

Don't forget existing advisors and other existing relationships you may have.  Your lawyer, accountant and other advisors often have large networks of clients and contacts and may know of some individuals who may be interested in investing in your company.  Even your family and friends may have business contacts that will help you reach the right investors.  As an added benefit, this latter group is likely to assist you without charge, which is always helpful in these rough economic times.