Mechanics of Distribution and Placement Agents

The operational layer under a private offering: risk, paperwork, who may sell, and the money.

Which One-Liners Win Points?

• Firm commitment and standby both put the agent on the hook, on different triggers. Firm commitment buys the whole issue up front; standby picks up only what remains unsold when the offering period ends.
• Best efforts, all-or-none, and mini-max never put the agent at risk. The issuer bears the shortfall, and unsold securities are not issued.
• All-or-none has one trigger, sell all or refund all. Mini-max has two: a floor that must be met before closing, and a ceiling that caps further sales. No Securities and Exchange Commission or Financial Industry Regulatory Authority rule defines these five labels.
• An indication of interest is non-binding. It becomes a sale only when the investor executes a subscription agreement and the issuer accepts it. Those indications also drive price, which is negotiated with the issuer rather than discovered through public bookbuilding.
• The agent delivers the private placement memorandum and must promptly transmit collected proceeds to the persons entitled to them. Receipt of the money is the trigger, not the close.
• A selling group member's obligations run to the dealer manager, under a separate agreement covering allocation, commission, and conduct, not to the issuer.
• The spread is not one number: a dealer manager fee for organizing the distribution, a selling group commission on units placed, and often warrants or stock.
• The conduct standard stays ordinary broker-dealer: fair dealing and non-misleading communications, plus the antifraud rule covering deceptive devices in trades away from an exchange.

Which Numbers Matter Most?

Which Gotchas Trip Students Up?

Exam Tip: Gotchas

• An issuer's own associated person may sell without registering only inside a narrow safe harbor. The three baseline conditions: no statutory disqualification, no transaction-based pay, no broker-dealer association.
• The once-every-12-months cap belongs to the incidental-duties path alone. The limited-purchaser and passive-communication paths carry no frequency limit.
• Failing the safe harbor does not by itself make someone a broker. Registration then gets decided the ordinary way.
• The safe harbor never reaches an outside finder. It covers only a partner, officer, director, or employee of the issuer or three affiliates.
• The two contingency rules are not one rule tested twice. One polices the all-or-none or mini-max promise, the other polices where investor money physically sits. Neither states a day count; the offering documents do.
• Neither holding method is preferred. A separate bank account with the broker-dealer as agent or trustee and a written bank escrow both work; the firm cannot hold the funds itself.
• A firm commitment offering is exempt from all of the payment-handling rule, prompt transmission included, not only from its separate-account and escrow piece.

One-Breath Recap

Five distribution methods split the risk of an unsold offering: firm commitment and standby put the placement agent on the hook, while best efforts, all-or-none, and mini-max leave the shortfall with the issuer. An indication of interest stays non-binding until a subscription is accepted, and the spread combines a dealer manager fee, a selling group commission, and sometimes warrants. An issuer's own associated person may sell without registering only inside a narrow safe harbor, and contingency money sits in a separate bank account or a written bank escrow until the contingency resolves.

Need more than the recap? Read the full Mechanics of Distribution and Placement Agents unit.