Placement Agency Agreements (How to Construct Clear and Enforcible Provisions)

A Placement Agency Agreement is an agreement between an issuer of stock of a company and a placement agent. Per the terms of the agreement, a placement agent agrees to use his or her "best efforts" to secure investors to invest in the company. The agreement is an integral part of the process by which a company tries to secure institutional or private investors as part of a public or private offering of stock. Generally a subscription agreement, an escrow agreement, a letter of opinion from the company's legal counsel, and a shelf registration statement and prospectus supplement will accompany this agreement.

Generally a placement agent will require a placement agency agreement to commence the process of finding buyers for the company's stock. In these situations, there are several important terms and conditions a new company must be sure to include in their placement agency agreement. Most importantly, the agreement must begin by laying out the underlying purpose of the agreement, and should next describe the terms of the appointment.

At the top of the agreement, the company will want list the parties and lay out the purpose of the agreement. For instance, this provision could read:
"This Agreement is dated April 1, 2002 between Placement Agency X (the "PLACEMENT AGENT") and Corporation Y (the "COMPANY").

The purpose of this letter agreement (the "AGREEMENT") is to set forth the terms and conditions pursuant to which DP shall serve as placement agent in connection with the proposed placement of common stock (the "PLACEMENT") of the Company. Such agency shall apply to up to three (3) institutional investors (the "Investors") which the Placement Agent may introduce to the company1. Placement Agent may assist the Company in raising an amount of capital not to exceed Ten Million Dollars ($10,000,000). All securities will be sold pursuant to an effective shelf registration statement and appropriate prospectus supplements (the "SHELF") and, at the time of the Placement, will be free from any contractual restriction or lock-up agreement. Upon the terms and subject to the conditions of this Agreement, the parties hereto agree as follows:"

Following this introductory purpose paragraph, the first provision should lay out the terms and conditions governing the appointment of the placement agent. This provision generally contains an exclusivity provision, meaning the placement agent is retained on an exclusive basis. In return for this exclusive appointment, the placement agent must agree to use his "reasonable best efforts" to execute the purpose of the relationship, which is to find investors to purchase the company's stock. In addition, this appointment provision should clearly state that the agreement does not constitute a commitment by the placement agent to purchase the securities and does not ensure the successful placement of the securities or the successful procurement of any other financing.

As in any enforceable contract, consideration must be present on both sides. On its face, it may seem that because the placement agent is under no obligation to successfully secure financing, the placement agent is not providing any consideration for the contract. However, under well-established case law, an agent's express or implied promise to use his or her "best efforts" to effect the purpose of the contract is deemed adequate consideration. Regardless, to eliminate all ambiguity, a drafter of a placement agent agreement should be sure to make this promise clearly expressed in the appointment provision of the agreement.

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