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A company should be particularly wary of so-called “finders”, which are not registered BDs. This is because any BD acting as a placement agent will be deemed to be “participating” in the offering, and according to both SEC and FINRA regulations, only registered BDs are allowed to so participate. From a legal standpoint, the most crucial requirement is that you only use a registered BD as a placement agent. If you are considering using a placement agent, you will want to do your homework, as with any potential partner. In the end, the decision whether to hire a placement agent will depend on the circumstances. If conditions in the broader economy are difficult, the services of a placement agent may also be necessary. Obviously, if the company has had difficulty raising capital in the past or is facing low interest in the present, hiring a placement agent may be helpful. For example, if the company is contemplating multiple rounds of private placements over an extended period of time, hiring a placement agent that can introduce the company to a significant number of potential investors (and who may be willing to invest in multiple financing rounds) could be very beneficial. Sometimes, however, using a placement agent is necessary or helpful. Any money not paid out to placement agents as commissions in a private placement is money the company retains for its own use. That being said, if an issuer feels that it can be successful in raising capital without employing the services of a placement agent (for example, perhaps it has only a few major investors who are willing to fully finance a later round), then there is nothing which requires that a placement agent be used. This does not mean, of course, that it is never helpful or necessary to use a placement agent in an early-stage fundraising round, but they are used much more commonly-and are in general much more helpful-in later-stage rounds by companies with some kind of established track record. On a practical level, companies in the early fundraising stages may also be less willing or able to pay the significant commissions demanded by placement agents for their services. In addition, pertinent information, such as what sorts of companies particular VCs invest in and at what dollar amounts, is often publicly available to a much greater extent than for later-stage investors. One reason for this is that the universe of potential early-round investors (e.g., VC firms and funds) is much smaller and, for lack of a better word, self-contained.
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Placement agents are almost never used in seed rounds or early-stage financing. The first thing to keep in mind is that placement agents are much more common in later-stage financing rounds.
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In addition, how to decide which specific placement agent to use? At this point, having discussed the services a placement agent can provide, the kinds of compensation used, and other important terms to keep an eye on when negotiating for the services of a placement agent, there is still the threshold matter of determining whether using placement agents makes sense (and when it doesn’t) in the first place.