Is Your Placement Agent Legit?

I received several comments and private emails about my post on Investment Agents – Good or Bad? A colleague sent me a good follow up note adding some flesh to my comment that the ratio of charlatans to qualified agents is 100:1.  He’s asked to remain anonymous, so I thought I’d summarize his comments here – the basic message being that there are some non-trivial legal considerations for the role the placement agent plays in soliciting investors and structuring the transaction.

In general, the SEC may turn a blind-eye if the agent (or “finder”, or “banker”, “advisor”, or “scam artist”) is only working on a one-off basis and is not involved with structuring the transaction.  However, if they do it as a line of business, receive contingent compensation, or are involved with structuring transactions it can be bad news for all concerned, including increased liability for the startup if things go south.

One interesting alternative for those that only perform services for private companies is the NASD Series 82 Examination Program. It’s a little known license offered by the NASD strictly for private placements. However you still need to be affiliated with a NASD firm to take the exam and transact securities.  For the legal minded among us:

“The Series 82 examination program is proposed in connection with a proposed change to NASD Rule 1032 to implement Section 203 of the Gramm-Leach-Bliley Act of 1999 (“GLBA”), which requires the NASD, as a registered securities association, to create a new limited registration category for any associated person of a member whose investment banking and securities business is limited solely to effecting sales of private securities offerings.”

Naturally this end of the capital markets is full of gray areas.  The SEC probably wouldn’t spend much time on a VC investor complaint (we’re supposed to be sophisticated after all), but if an entrepreneur takes angel – or worse – non-accredited investment – through an unregistered placement agent they could be setting themselves up for a world of hurt.

So – if you are considering hiring an agent to help you raise money, in addition to asking for a resume, list of previously completed deals, and references, you should ask for the agent’s regulatory status.  This will help you with the charlatan:legit_dude ratio.

  • The comment about agents acting as unregistered brokered dealers is a good point. I have seen some cases where attorneys have helped companies to get around some of this risk by limiting the activities of the agent to introductions only, etc. and preventing things like negotiations, etc.

    Tricky business nevertheless.

  • That’s exactly why I never went from business research, marketing and competitive intelligence to doing the full fund-raising networking. 🙂 I think I still do great research given the fact that I don’t subscribe to the right databases (build a board? or buy a subscription?)

    Excellent explanation and least I know enough now to separate out the con artists from the true opportunities. I’ve known since 1999, but you’ve got excellent decision criteria here.

    Brad, I’m learning a lot from your blog. Unfortunately, the weight loss isn’t going to be instantaneous, especially when I’ve got this bag of Mint Milanos with 1 cookie remaining.

    Best Regards,


    Posted by Cindy

  • Good post. I agree that having some kind of filter in place is a great idea. I wonder if there’s not a different behaviorial test that would work just as well.

    My experience is that sometimes unregistered brokers can be excellent deal makers with professional credibility and unmatched intuition. Some just avoid the SEC due to their libertarian nature.

    I wonder if the registration process really prevents charlatanism anyhow.

  • JayR

    I won’t get into the issue of the legality of finders / placement agents, but I’d like to share some observations drawn from my 15 years of experience doing venture deals in terms of when and how an entrepreneur should seek assistance in raising capital.

    There are two types of entrepreneurs – those who know their industry intimately, and those who don’t. Either type can be successful – the key is knowing the type of help that they need and asking the right questions.

    The ones who know their industry well should know some relevant players in the industry – strategic players and financial ones (including the VCs). They should be able to put together a decent board and surround themselves with the right advisors. When it comes time to raise capital, they can tap that network for introductions. This is what VCs respond to, because for all of the social networking and disintermediation that the Web enables, the VC industry is still one built on personal interaction and relationships.

    When I see someone who fits this description hiring someone to raise early-stage VC money, it concerns me. This person will likely know the industry better than the finder/broker they’re hiring, so why hire one? If it’s because the entrepreneur thinks that the fundraising process is too “distracting”, then he/she is selling the process short. You shouldn’t be thinking about pure money if you’re looking for VCs – you should be thinking about finding a partner, and you should be putting the time into the decision. You can’t delegate it to someone else, and if you really don’t want a partner, then you should be looking for VC money. Now, there are pieces of the task that can be outsourced – you can get help, for example, with financial projections and putting together Powerpoints. But the entrepreneur must take ownership of the business direction the company takes and the decision of finding a partner.

    The entrepreneurs who don’t know their industry well (or who has not been in the venture economy) may well need help, but the help they’ll need will likely extend beyond raising capital. Good VCs want to know how you’re going to spend the money they’re going to invest in you. If you don’t know your industry, you probably won’t know how to answer that. And any finder/broker who is simply being hired to help you raise money won’t know either. So if you aren’t going to partner up with someone, you’re going to need some help, and you probably need more than a simple finder/broker. You need strategic advice not just on capital-raising, but on business development and strategy. You need someone who is willing to take the time and effort to really get inside your business (and your head), and someone who has solid industry contacts. You’ll probably compensate that person other than purely on a success fee basis, not just for legal concerns but in order to properly incentivize the person you’ve working with. Admittedly, it is harder to find someone like this and it may cost you more, but if you have done your homework and picked the right person, it should pay off in the long run.

  • softwareentrepreneur

    One good simple filter regarding these agents is how big of a retainer they charge. Zero is best and probably anything over $1000 per month is not worth considering.

    Good agents won’t take you on as a client if they don’t think you stand a chance of raising capital. And don’t worry about compesating them (beyond the small retainer) if they fail. Raising money is risky and but points on millions of dollars is a huge reward. They need to take the risk to get reward.

    Simply put agents seeking any sizeable retainer are making a strong statment that they lack confidence in your companies ability to raise money. Why would you hire someone who doesn’t believe they can get the job done?

  • Steve Breckenridge

    Certainly there are incompetent (or worse) placement agents/advisors/investment bankers/finders/brokers/whatever roaming the capital markets. However, even for the reasonably knowledgable and connected entrepreneur, the right advisory relationship can add value in the capital raising process.

    As a previous post correctly points out, different companies have different circumstances, capabilities, contact networks, and levels of financial and strategic sophistication; these situation-specific factors will help determine whether it makes sense to engage a placement agent/advisor, and what capabilities that individual (or firm) should bring to the table.

    One function that a good placement agent serves – and this benefits both the company and potential investors – is to organize, interpret and present the company’s information in a way that is most useful to investors. An experienced advisor is familiar with the investor community’s basic information needs, analytic framework and investment criteria, and can significantly streamline the evaluation process, from introduction to confirmatory due diligence, to the benefit of all parties.

    Another potentially valuable role is in preparing the entrepreneur client for the investment process and ensuring that there is an understanding of some fundamental consequences of accepting outside capital. In short, the experienced advisor ensures that key control and economics issues (i.e. those that might be dealbreakers) are surfaced and substantially acceptable to the shareholders/company before both company and potential investors waste significant time and resources talking about a deal that really has no chance of happening. It is surprising how many entrepreneurs do NOT understand that a venture capital financing entails a substantive loss of control of the company.

    An experienced agent/advisor has been through many financing transactions, negotiated many term sheets and knows (generally and often very specifically) what is “market.” Obviously this benefits the client company (who presumably is less familiar with the intricacies of protective provisions, ratchet formulas and the like), but it can also benefit the investor as there is less time spent arguing trivial points and more time focused on discussing/explaining win-win terms. Can a good deal lawyer do the same thing? Sure. Can that lawyer also work effectively with the company through the business strategy, market positioning, and due diligence phases of a capital raising process? Maybe less likely. Is there a benefit to having an end to end advisor? Entrepreneurs, your call.

    As for retainers/advisory fees, I agree with the previous post that reputable agents/advisors will not accept what they believe to be an assignment that has slim or no chance of succeeding. However, it does not follow that requiring fair compensation for services rendered signals low confidence in the client company. If a company does not value, or need, the benefits described above, but seeks merely administrative assistance or an introduction to capital sources, then it makes sense to engage a broker/finder who will work for a minimal retainer and the possibility of compensation upon closing. On the other hand, if the above services/benefits are valued and needed, an advisor/agent will spend significant amounts of his time working on behalf of his client, and – like the company’s deal counsel, tax advisor or similar professional – will expect to be fairly compensated for his services. An advisor/agent cannot normally be expected to ascertain at the beginning of an engagement the validity of the company’s stated financial performance, competitive position, or intellectual property value (among many other things that will ultimately factor in the company’s ability to raise capital). Furthermore, while percentage success fees may compensate an advisor handsomely, as the previous post points out raising money is risky; a professional advisor/agent should no more be expected to assume the company’s equity risk than would the company’s outside counsel or the entrepreneur’s financial planner. (Worse actually – the advisor risks incurring an actual operating loss as well as a high opportunity cost during the engagement, and derives no value from it, while facing a capped potential upside.) Good advisors, naturally, won’t do this; they don’t have to. As with other resources, you generally get what you pay for.

  • Stella

    Where do I find a list of SEC registered placement agents that are reputable and would be willing to deal with a small private offering ($5 Million)? We have a niche market of $5.0225 Billion, good potential and IP products. We are willing to pay 10% fee to be put in the front burner. Just mind boggling to try and find them through yellow pages, or sites that are unknown.

    Thank you!

  • What is the difference between private placement and marketing/business development? All have the same goal: Craft the message, create the tools to sell it, generate the buzz, and get the principals in front of qualified leads. Principals could and should be the closers – you will learn more and create important contacts. Private placement agents seem to be highly paid business development contractors. Which in some cases by be worth it. Especially in the $200M+ world.

    But for those looking to raise money in the $1M – $50 million zone (which is peanuts in the world of private equity but big dollars for most. I have some helpful hints.

    I speak from experience as a marketing/BD contractor who helped a firm raise private equity for a Reg D to the tune of $20M in 6 months with $150M in the pipeline. My company is not a private placement agency. I have never done this before, but learned a few tricks that may help you:

    Hire or contract a marketing person. Work with them on the following:

    1. Do the business 101 basics: Articulate and KNOW your mission (the soul), vision (the audacious plan), and the strategy to get there. Create your 30 second elevator pitch from this. Also write a powerful, short but sweet business plan with a killer executive summary. Make the business plan look graphically outstanding. Create the executive summary in a seperate emailable PDF, include lots of graphics/graphs whenever possible.

    2.Create a logo that is professional – don’t spend a fortune, it is what you do with the logo that counts.

    2. Create a website – nothing will help you to put words and pictures to your vision faster than creating a website – it is your reception desk and your sales team. You should be able to do this for less than $5k. Create a “for investors” link. Have an accredited investor online form there. Connect to your email in box.

    3. Create a print on demand brochure that you can send off. You need to be ready when someone asks for more information. Also create print on demand letterhead and envelops – look legit!! Simple, just embedd your logo into the doc, and print on stylish paper with the old ink jet printer.

    3. Subscribe to Google Alerts. If you are a real estate investment group, subscribe to: “private equity for real estate.” Subscribe to several alerts with several key words. Everyday you will receive press releases and articles from all over world specifically about your business – you will find out who the movers and shakers are very quickly. Find someone who might be interested in you, email them. Add any potential contacts to an excel database spread sheet (you can do mail merges for direct mail campaigns).

    4. Do association searches in Google that relate to your business. Search for venture capital in your specific business. Go to They list hundreds of venture capitalists. Add these contacts to your spreadsheet.

    5. Depending on your SEC reg, you may or may not be able to pitch your story. In most cases, you must have a pre existing relationship. This is where your marketing person will be worth the weight in gold.

    6. Use email as the cheapest way to get the word out. Do not put more than 15 email address in at a time or you may pop up spam. Best to write a personal email to each individual. Simply ask them, does your firm consider investing in….. Always, always have a signature line with your name, phone, website and a quick line about what you do.

    7. Write press releases and syndicate them on the internet.,, and many other free sites allow you to upload your press release. Syndicating press releases will get you reciporcal links to your site, which will move you up in the google searches. Add these press releases to your website.

    8. Last but not least, PICK UP THE PHONE and call. If you get a “no,” do NOT hang up until you ask the simple question, “do you know anyone who might be interested in ______?”

    When you market your vision from the inside, it will cost you much less, and you will create your own database of contacts, mentors, competitors, advisors in your specific industry that will serve you well into the future.

    • Terry

      Great tips. Janelle, what is your email?

  • Gregg Wood

    How do you find a good Broker/Finder and Marketing Firm for this sector?

  • JSS

    I have been raising capital for 10 years, possess the Series 7 & 66 licenses, have a Broker Dealer to legally sell the offering and have developed a reasonably deep Rolodex of institutional and high net wroth investors over the past 10 years. Here's a little hint for folks seeking capital. If you cannot afford a negligible retainer, are not willing to pay between 3 and 9 points, and give up an equity stake in your company then you are out of luck. There are scammers out there, but a few of us actually do this for a living and I assure you, if I cannot sell it, then I do not get involved. The "bread is not buttered" with retainers it is buttered with success fees. I look at about 10 transactions per month and take on 3 a year no more.

    The odds of successfully raising capital is about 1.00%, thus for ever 100 deals a capital provider reviews they pick one. The odds are almost insurmountable, but, best of luck.

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