A broker-dealer, registered with the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA), can be a great help in carefully and successfully seeking capital in a private placement offering.
What Is a Broker-Dealer?
The “broker” in the name means that the firm can sell securities for clients and the “dealer” in the name means that the firm can sell securities for themselves. You will be dealing with this agent as a broker for your private placement offering. They make their money through fee-based services and from commissions on funds raised.
How a Broker-Dealer Can Help
Private placement broker-dealers can pull from their Rolodex of angel investors and networks to match up your offering with interested parties. They may also have ties to financial institutions (such as investment banks, venture capital firms, private equity firms, etc.) increasing the range of options you have for buyers.
Broker-dealers can assist you in creating your private placement memorandum, sales presentation, executive summary, and other documents. They can coach you on presentation methods and techniques or make presentations with you or on your behalf.
A reputable broker-dealer signing off on your offering also reduces an investor’s risk. The prospective investor knows that a broker-dealer has done its own due diligence into the company before agreeing to work with them and they can breathe easier than if the company is selling its shares directly.
Problems of Working with Unregistered Agents
Any firm or agent outside of your company, whether they are compensated or not, who helps you to find a buyer for your security is acting as a broker in the eyes of the law. If they are not registered with FINRA, they face stiff penalties for working illegally. As the company who hired them, your transactions may potentially be voided because of working with an unregistered broker. This can mean that there will be a rescission, whereby the contract is voided and the funds raised must be returned to the buyers. If you have already used the funds (or even if you haven’t) you may be subject to lawsuits and additional penalties at this point.
Furthermore, the fact that a firm or individual who is substantially acting as a broker-dealer hasn’t taken the time to register should tell you that they do not take this part of their career that seriously. For the best results, always work with an agent who must stake his career and reputation on each deal or transaction he performs.
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