Different Levels of Placement Agents, Part 3

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The fifth tier

At the next level is an amorphous group of firms that consist mainly of a retail sales force engaged largely in promoting penny stocks public securities of issuers listed on the NASDAQ Small Cap Market and the OTC Bulletin Board and Pink Sheets. These issuers are too small or shaky to be listed on a national market exchange such as the New York Stock Exchange (NYSE). Some of these firms are legitimate and perform necessary market functions in maintaining some liquidity in public securities that the big guys don't deign to pay attention to. Others, though, are what are known in the trade as bucket shops or boiler rooms. These brokers cold-call potential customers and attempt to push questionable securities on an unsuspecting public for no reason other than the commissions the trades will garner.

On occasion, these firms attempt to place private equity, and many of them are not particularly picky about the size of the offering. That can be good news for a legitimate entrepreneur because, as they say, all money is green. And despite questionable stock sales practices in the public markets, a bucket shop sometimes knows where the appropriate buckets are. However, astute professionals don't recommend doing business with firms in this bracket. Even if you successfully raise private equity, there's no telling what kind of story the salesperson told to the investor. A group of angry and disappointed investors can be worse than no investors at all.

Here's a checklist of things to remember about fifth-tier placement agents:

They'll work for any company.
They require no funding minimum.
The only good news about them is that you can be sure they'll take you on.
The bad news is the same as the good news.

The new tier

Recently, a new category has been added organizations are styling themselves as incubators. The term incubator includes a couple of possibilities:

Physical incubators are office and conference facilities set up to house emerging growth firms in a quasi-private, quasi-communal environment. A typical physical incubator comprises an entire floor or floors of an old loft building split into cubicles occupied by early stage firms and provides shared conference, reception, phone-answering, and cafeteria facilities. Incubators are particularly useful for firms specializing in information technology because the space typically includes access to broadband Internet capability.

Virtual incubators also serve a multitude of clients and provide an array of services, including business consultation (they will help with a business model), technical work (they will help design a Web site if that's part of the model), recruiting, financial management, and strategic advice.

Some of the more visible firms that style themselves as incubators are in fact sources of capital the equivalent of venture capital funds. These firms create synergies among their portfolio companies by, for example, introducing a Web site design firm in which the incubator has invested to an investee firm that's looking for Web site design services. We mention firms operating under this label were very much in fashion because many so-called incubators are actually placement agents in the classic sense. By calling themselves incubators and offering ancillary services business consultation, for example the incubator can charge a higher fee, particularly a fee expressed in terms of equity participation in the entrepreneur's company.

Our intent is not to denigrate a phenomenon that has been highly useful to a number of emerging growth companies in terms of advice and capital, but simply to point out that a rose by any other name smells as sweet. A placement agent, whether it's called a finder, an investment bank, or an incubator, functions most usefully as a placement agent. Emerging growth companies can use business advice and share office space, technical services, financial management, and overall strategic direction; however, in the final analysis, the most prominent need is the need for investment capital. And if a firm called an incubator can meet that need, then so be it.

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