1.1.2.1.4. Underwriting a Private Placement
With a private offering, the issuer selects a sort of underwriter called a placement agent or a deal manager to place the securities with investors. The placement agent is a registered investment banker or broker-dealer, and the terms under which the agent works are negotiated by the two parties and set forth in a private placement agreement, also called the placement agent agreement. For the exam, know that the placement agent agreement is where the placement agent's fees can be found.
The placement agent is usually employed in a “best-efforts” arrangement, where the agent is not obligated to purchase any securities or guarantee success. A best-efforts commitment is also called a contingency agreement. In this kind of agreement, the underwriter agrees to use its best efforts to sell the issuer’s securities, but the underwriter does not guarantee that all the shares will be sold. Nor is the underwriter financially responsible for the securities it doesn’t sell. The underwriter is allotted a certain period of time to sell the issue, usually between 30 and 90 days. If a required portion of the issue has not been sold by the end of the subscription period, the offering will be cancelled, the securities are returned to the issuer, and the money is returned to the investors.
There are two types of best-efforts commitments.
1.In an all-or-none (AON) commitment, the underwriter sells all the shares in the offering or the offering is voided. More specifically, the underwriter must receive the offering by a certain date and sell it within a specified period of time. Otherwise the entire offering will be returned.
2.In a mini-max commitment, also called “part-or-none”, the underwriter commits to sell a minimum number of shares of the offering or the offering will be cancelled. The underwriter is expected only to use its best efforts to sell the remainder. A mini-max is sometimes called a part-or-