The Expert's Corner

Assuming in the course of an unregistered private placement, by accident or design, an action by or on behalf of the issuer amounts to an instance of "general solicitation" which contaminates the placement vis-à-vis the provisions of Reg. D. If the placement remains the same placement (the terms are not significantly changed), nonetheless the parties may adopt a cooling off period, after which most lawyers believe the placement may resume ... on the theory that the effects of the "general solicitation" have been vitiated. Read More...

With the success of raising money for private equity funds becoming increasingly difficult and attenuated, unless the fund is one of a handful of top decile funds in terms of track record, a number of fund sponsors, particularly those interested in raising first time funds, are switching to Plan B. Plan B entails organizing what we have referred to in the past as a pledge or a synthetic fund.

There is not a lot of literature on how to structure a pledge fund ... no "cookie cutter" or "boilerplate" model forms. We plan to cure that by, first, presenting a model term sheet for a pledge fund on which I am currently working. Read More...

The typical private equity fund limited partnership agreement exposes the possibility of Draconian penalties on limited partners who default and refuse to honor a capital call. The general partner typically has the ability to waive or modify the penalties ... indeed to impose just about any kind of penalty it wants, including (as per many agreements) doing nothing at all, simply letting the defaulting partner off the hook. Read More...

Founders desperate for financing debate whether the faucet will turn on if they engage a placement agent, a question to be addressed in a real-world context. In the first place, the great majority of first-round financings are not economically interesting to an investment banking firm. The fee for a placement is usually in the range of 2 to 5 percent of the amount raised. Assuming a $1 million first-round financing, a fee of $20,000 to $50,000 is not likely to attract many takers in the investment-banking fraternity, when fees for acting as financial adviser in contested merger-and-acquisition transactions run into eight figures. There are exceptions to this, as to any other proposition. Encore Computer, because of the splendid reputation of its founders, attracted a high degree of interest from major-bracket investment bankers in the seed round; William Poduska, on leaving Apollo Computer and organizing Stellar, was able to titillate investment-banking appetites to a fever pitch. (Neither firm, it should be noted, remains as an independent entity.) However, the traditional founder is wasting his time beating down the doors of the elite investment bankers to help him raise money in the early rounds. Smaller investment-banking houses, their sights set lower than Morgan Stanley or Goldman Sachs, are more likely candidates, but even they are not enthusiastic about hitting the pavement to arrange a first-round investment because the amount of work is enormous and the payoff is often chancy. Read More...

A close relation of this question has to do with side letters. Assume (i) a partnership agreement states unambiguously, in a provision reiterated in the private placement memorandum, that no limited partner can withdraw (subject to specified instances ... the ERISA kick out rules, for example); and (ii) an offshore partner, one with a lot of clout, obtains in a side letter a special, omnibus right to reduce its commitment if circumstances in the home country change to the point the investment is subject to "unfavorable domestic tax consequences." Assume the side letter is not voluntarily disclosed and some investors are unaware of the content. Read More...

The recent issue of The Private Equity Bulletin discusses the question whether an individual or entity which is and only is, a placement agent (a "finder") must register under the '34 Act and apply for membership in the NASD. The issue is thorny, particularly now that the ABA Committee published a Task Force report, available in the current edition of The Business Lawyer , and online at http://www.ibba.org/_files/ABATaskForceReport6-2-05.pdf which could easily be construed as the pre-cursor of an SEC proposed regulation requiring so-called "finders" to register in accordance with a regime commonly known as "Broker/Dealer Lite." Pending the resolution of this issue, which is very much in suspense, law firms have to consider the following: Read More...