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Perils of Using Unregistered Placement Agents Wilson Sonsini Goodrich & Rosati
PROFESSIONAL CORPORATION
Perils of Using Unregistered
Placement Agents
When Raising a Private Equity Fund
June 2003
2273069 Wilson Sonsini Goodrich & Rosati
PROFESSIONAL CORPORATION
2
Introduction
Fund Managers increasingly are turning to placement agents
to raise capital
The SEC recently limited the scope of activities in which an
unregistered placement agent or finder (Finder) may
engage without being considered a Broker Finder generally must not have acted as a placement agent in the
past and must not receive transaction-based compensation
Using a Finder who acts like a Broker may have adverse
consequences to a Private Equity Fund and its General
Partner
Techniques are available to mitigate the impact of the SECs
position on the use of Finders Wilson Sonsini Goodrich & Rosati
PROFESSIONAL CORPORATION
3
Background
It is unlawful for any Broker to effect any transactions in, or
to induce or attempt to induce the purchase or sale of, any
security unless the person is registered as a Broker with
the SEC
Broker any person engaged in the business of effecting
transactions in securities for the account of others
Finder a person who participates (not as a principal) in
securities transactions, but is not registered and is not
required to register as a Broker or broker-dealer Wilson Sonsini Goodrich & Rosati
PROFESSIONAL CORPORATION
4
Engaged in the Business of Effecting
Transactions in Securities: Key Factors
Receiving transaction-based compensation Success fees
Acting or offering to act as an agent for others in securities
transactions Holding ones self out as a Broker Advertising Assisting others in completing securities transactions
Participating in the securities business with some degree of
regularity Participating in the sale or distribution of securities as an agent (not
just as a buyer) Wilson Sonsini Goodrich & Rosati
PROFESSIONAL CORPORATION
5
Background - Finders
In the past, activities of Finders included: Distributing offering materials to prospective investors Receiving transaction-based compensation Participating in the negotiation process Advising the General Partner or Fund on structuring issues
SECs revocation of a no-action letter in 2000 narrowed the
scope of permissible activities
A Finder who engages in non-permissible activities is acting
as a Broker and must register with the SEC Wilson Sonsini Goodrich & Rosati
PROFESSIONAL CORPORATION
6
Post 2000 - Using a Finder
A Finder should only introduce potential investors
to the Fund
A Fund should not pay a Finder transaction-based
compensation Pay the Finder a retainer and/or a monthly fee regardless of
whether it delivers investors to the Fund Wilson Sonsini Goodrich & Rosati
PROFESSIONAL CORPORATION
7
Post 2000 - Using a Finder (cont.)
A Finder should otherwise refrain from
participating in the fundraising process No negotiations on behalf of investors or the Fund
A Finder generally should not have participated in
other offerings Involvement in prior transactions can be problematic Repeated activity as a Finder may rise to being engaged in
the business of being a Broker and can invite SEC scrutiny Precise limit on prior activities is unclear Wilson Sonsini Goodrich & Rosati
PROFESSIONAL CORPORATION
8
Consequences of Using a Finder Who Acts
as an Unregistered Broker
The Fund may lose its private placement exemption for
issuing interests It may be deemed to have engaged in a general solicitation
Investors may have a recission right
The Fund may have to register as an Investment Company
The Funds law firm may be unable to provide customary
securities law opinion in connection with Fund closings Institutional investors may refuse to close Wilson Sonsini Goodrich & Rosati
PROFESSIONAL CORPORATION
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What to Do
If your Finder might be considered an
unregistered Broker: Have the Finder register as a Broker-Dealer Have the Finder affiliate with a registered Broker-Dealer Make the Finder a Partner, Member or Employee of the
General Partner or Back-Office entity Exemption from registration available for associated persons
of an issuer Wilson Sonsini Goodrich & Rosati
PROFESSIONAL CORPORATION
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Associated Person Requirements
Compensation cannot be based either directly or indirectly
on transactions in securities No success fees No bonuses based solely on money raised
Person must perform substantial duties for the Fund other
than fundraising Administrative duties, investment activities, analysis, due diligence
Person must not have, during the preceding 12 months: Been an associated person of a broker-dealer Participated as an agent in the sale of securities for any issuer Wilson Sonsini Goodrich & Rosati
PROFESSIONAL CORPORATION
11
Conclusion
Finders should be used only in very limited circumstances Avoid transaction-based compensation Avoid Finders who regularly participate in securities transactions
Improper use of Finders can have an adverse effect on the
Fund Recission rights Loss of private placement exemption Failure to satisfy closing conditions
Using registered placement agents is the most prudent
approach Consider Associated Person exemption if necessary Wilson Sonsini Goodrich & Rosati
PROFESSIONAL CORPORATION
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This presentation is intended only as a general
discussion and should not be regarded as legal
advice. For more information, please contact your
Fund Services Group attorney.
Wilson Sonsini Goodrich & Rosati
Fund Services Group
650 Page Mill Road
Palo Alto, California 94304
Tel: 650-493-9300
www.wsgr.com