Brad Feld

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Is Your Placement Agent Legit?

Jan 04, 2006
Category Management

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.