Written by attorney Matthew Adam Pek

The Issuer's Guide to PIPEs: Questions to Ask When Drafting Placement Agent Agreements

"From a practical standpoint, when negotiating a placement agent agreement for a private offering of securities in a privately held company, a reverse merger, or a private investment in public equity (PIPE), issuers need to be vigilant about protecting their interesBlts, because placement agents are not shackled by Financial Industry Regulatory Authority (FINRA) rules, guidelines, or review as to terms or compensation. For example, many other types of offerings afford issuers the protection of, inter alia, the FINRA Corporate Financing Rule (i.e., FINRA Conduct Rule 2710), which limits the terms and compensation available to broker-dealers under a “fair and reasonable" standard, identifying certain arrangements in particular as “unfair" or “unreasonable." Significantly, Conduct Rule 2710 expressly prohibits (i) certain fee “tail" agreements; (ii) any “right of fi rst refusal" to act as an underwriter in future fi nancings for a term greater than three years; (iii) any “excessive" non-accountable expense allowances; and (iv) certain warrant terms and conditions, if used as underwriting compensation.

Not so with PIPEs, which have proliferated in contemporary fi nancial markets. Such offerings are not subject to Conduct Rule 2710 or to FINRA review in general.1 Indeed, it may be the case that private placements for private companies and PIPEs, both standing alone and as used in connection with reverse merger transactions, have gained prevalence because of their status as “exempt offerings" under FINRA Conduct Rule 2710. As a result, issuers are inevitably exposed to certain unregulated risks, and are more likely to encounter unreasonable terms. (SeeThe Issuer's Guide to PIPES, Chapter 10, at p. 175)

Questions to Ask kWhen Drafting Placement Agent Agreements:

In sum, it is critical to remain mindful that a placement agent agreement can become complicated, because the parties’ rights, duties, and obligations do not necessarily terminate after the main goal of the agreement has been accomplished. All too often, a successful transaction turns sour afterwards, friends become enemies, disputes over rights of fi rst refusal and fee “tails" ensue, exclusives are extinguished, and fees are fiercely contested in costly litigation. An unfortunate ending, indeed, to what may have been a productive relationship.

By addressing and resolving the points discussed in this chapter, the parties to a placement agent agreement will have a better understanding of their relationship both before and after the private company goespublic. This will allow the company (or companies) and the placement agent to have a sense of where they stand at each and every phase of the transaction, thereby enabling all parties to enforce the agreement without resorting to litigation.

With the foregoing considerations in mind, issuers are encouraged to consult the following easy-to-reference summary of the key questions to ask when negotiating and drafting a placement agent agreement. Failure to address and resolve the following twenty-one questions is likely to invite costly litigation, and certain to lead to a regrettable outcome for the impulsive issuer.

21 Questions to Ask When Drafting a Placement Agent Agreement:

  1. Have you expressly set forth in separate paragraphs the nature and scope of all services to be performed by the placement agent?

  2. Have you expressly set forth all conditions or prerequisites related to the placement agent’s compensation for each particular service, so that there are no questions regarding timing or type of compensation?

  3. Have you clearly set forth the criteria for a “successful closing"?

  4. If the agreement contemplates multiple closings, have you expressly delineated each form of compensation corresponding to each closing?

  5. Have you clearly set forth the criteria for a “successful introduction" to any third-party investor (or other pertinent third parties)?

  6. Have you expressly disclaimed or disclosed a list of all of the company’s existing contacts or investors with whom the company has a preexisting relationship, so as to avoid any costly reintroductions?

  7. Have you expressly disclaimed or disclosed a list of all third party investors to whom the company would like to be introduced, i.e., a list of the company’s “target investors"?

  8. Have you provided for the event of the company undergoing in an intermittent merger or acquisition while the placement agent is still engaged by the company, whether before or after the fi nal successful closing?

  9. Have you clearly defined the term or duration of the contract?

  10. Have you clearly set forth any and all termination rights, if any, including which of the contracting parties may exercise the right to terminate, and when such rights may be exercised?

  11. Have you clearly set forth all “triggering events," meaning conditions or events that will either trigger automatic termination of the contract or trigger a party’s right to terminate the contract?

  12. If the agreement provides for compensation to be paid in the form of options or warrants, have you clearly set forth the formula(s) to be applied for purposes of calculating such compensation?

  13. Have you clearly identifi ed and defi ned any and all “exclusivity rights" for the placement agent, such as whether the agreement is exclusive, and if so, for how long?

  14. Have you clearly identified any and all fee “tail" or “right of first refusal" provisions, and if so, have you clearly defined any and all limitations thereof?

  15. Do you have a clear understanding of who will comprise the cast of characters at every step of the PIPE transaction, particularly (both) before and after any successful closing?

  16. Have you considered any and all legal theories upon which the placement agent will likely rely in litigation in order to hold the company, one of its subsidiaries, or a newly formed WOFE liable for a breach of the agreement (for example, successorin-interest and alter-ego theories)?

  17. Have you clearly set forth the conditions, events, or circumstances under which attorneys’ fees or indemnifi cation rights will be available to a prevailing party in the event of an unavoidable litigation?

  18. Have you selected the most favorable forum and venue for the company?

  19. Have you addressed any potential jurisdictional defenses by obtaining an executed affi davit of consent to jurisdiction or waiver of jurisdiction?

  20. Do you have a fully executed placement agent agreement?

  21. Have you sought to limit the placement agent’s indemnity?"

(Excerpt above taken from The Issuer’s Guide to PIPES: New Markets, Deal Structures and Global Opportunities for Private Investment in Public Equity, Bloomberg Press (Dresner, Steven, 2009), Chapter 10 of which ("Placement Agent Agreements") I co-authored; see id., Chap. 10, at pp. 175-187).

Additional resources provided by the author

*A complete copy of the "PIPEs" publication referenced above is available for full public viewing here: (*Excerpt below taken from the "About the Contributors" section of the foregoing publication; see id. at p. xxii): A B O U T T H E C O N T R I B U T O R S Matthew Pek is an associate in Guzov Ofsink’s litigation, arbitration, and mediation group. While his primary practice centers on complex commercial litigation, Matthew has represented clients in a variety of general litigation matters ranging from estate proceedings to intellectual property and free speech litigation. Matthew has successfully appeared in both state and federal court on a diversity of litigation matters, in which his victories include a federal trademark and domain name infringement prosecution in the Eastern District of New York, securing the deletion of infringing websites within twenty-four hours of demanding such emergency injunctive relief; defending Manhattan condominium owners against a mechanic’s lien action, securing their dismissal based on an issue of first impression; and an emergency application to Supreme Court, Commercial Division to freeze shares of stock held by a transfer agent in a successful effort to thwart suspected fraudulent activity. Matthew has second-chaired a federal trial in the U.S. District Court in Connecticut and has assisted in defending a preliminary injunction action before the Southern District of New York. Matthew has demonstrated his ability to finish what he starts, successfully executing upon multiple judgments within the State of New York. A relentless advocate, Matthew remains a devout and active pro bono practitioner in addition to his private practice.

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