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What is Reasonable Compensation for Placement Agent and Investment Banking Fees to Raise Financing Capital? – A Market Survey & Market Research Analysis BY SCOTT A. BARNES, CPA, CFF, CGMA and STEWART E. ELLIOTT, JR.

What is the reasonable compensation for a placement agent or investment bank to raise capital? The answer is, “it depends on several factors.” Barnes & Company recently performed extensive independent research and a market survey of the fees charged by investment banks and placement agents for both privately-held and publically-traded companies. As expected, the fees charged vary by size and reputation of the placement firm leading the offering, the overall size of the capital raise, the type of capital being raised and the operating history of the company on which the capital is being raised. Our research identified several critical factors that drive the ultimate fee charged by placement agents and identified a general range for which placement fees can be expected to reasonably fall. Investment banks and placement agents have historically maintained a high level of secrecy over the fees that they charge for acting as financial advisors on behalf of a company. Many of these firms consider their fee structure as trade secrets and generally refuse to discuss them publicly. Former insiders to the investment banking industry and other professionals that have extensive experience in working with the securities underwriting and placement process have noted the fees generally charged, but little to no independent research is available to either analyze the reasonableness of specific fees charged or define the analytical process in determining where within a range of potential fees the fee is most likely to fall.

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Overview of Investment Banking and Placement Agent Process Whether dealing with one of the major Wall Street investment banks or a middle-market to small placement agent firm, the process of leading an underwriting and placement engagement as a financial advisor is virtually the same. The time commitment required by the placement agent to oversee a capital raise is virtually fixed whether raising $10 million or $100 million. As a result, the placement agent fee as a percentage of the gross proceeds expected is generally inversely related to the amount of the capital being raised. Accordingly, the placement fee as a percentage of the value of the securities/debt being offered to the market place will be higher for smaller dollar denominated capital raises compared to larger raises.

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Many investment banks and placement agents will have a minimum placement fee since, to a certain extent, the amount of time required to lead the underwriting and placement process is generally fixed regardless of the size of the placement transaction. For example, Wall Street investment banks have minimum fees in the $3 to $5 million range. The minimum fees for middle market to smaller market investment banks and placement agents can range from $250,000 to $1 million, depending upon whether the placement is for equity or debt instruments. Why Should a Placement Agent be Retained? The primary reasons to retain an investment bank or placement agent to lead the placement of debt or equity instruments includes:

Ø Expertise and in-depth knowledge of the industry and pre-existing relationships with potential purchasers of debt and equity instruments;

Ø Investment banks and placement agents can lend credibility to the company offering within the marketplace;

Ø The substantial reduction in the time period to complete a successful offering compared to company management attempting to perform an offering on its own; and

Ø Allows company senior management to focus on operating the business and avoid much of the distraction of being hindered by administrative and due diligence process of an offering.

What is a Company Paying for When Retaining a Placement Agent? When engaging an investment bank or placement agent to lead the capital raise of either debt or equity, a company should expect the placement agent to perform the following services for the fee to be charged:

1. Review the business and operations of the company and its historical and projected financial condition;

2. Assist in the drafting of an offering document, or in the case of a publicly-traded company assist in the preparation of the prospectus;

3. Assist the company in formulating a marketing strategy for the offering of the debt or equity instruments;

4. Identify and contact prospective purchasers of the debt or equity instruments;

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5. Advise the company as to the timing, structure and pricing of the placement of debt and equity instruments;

6. Advise the company in the strategy and tactics of negotiation with potential purchases and participate in the negotiation process;

7. Lead the process of securing confidentiality agreements with prospective purchasers and maintain copies of all confidentiality agreements;

8. Coordinate all due diligence, including meetings and requests for information;

9. Evaluating term sheets received; and 10. Review the documentation and terms of the purchase of debt

and equity instruments. In all respects, the investment bank or placement agent will act as financial advisor during the placement process. A clear understanding of the services to be provided by the investment bank or placement agent should be set forth in an engagement letter along with the related fees to be charged for those services. What Are the Components of the Placement Agent Fee? Generally, there will be three components to the ultimate compensation charged by an investment bank or placement agent. Depending upon the complexity of the offering of debt or equity instruments, the components of the investment banking or placement fee may comprise the following types of fees or expense reimbursements:

Ø A monthly or fixed advisory fee; Ø A placement fee for the successful completion of the offering;

and Ø A low cost or no cost warrant for a specified percentage of the

company’s equity. The investment bank or placement agent will also be reimbursed for its out-of-pocket expenses and any legal fees that may be incurred related to the performance of the services. Generally, any reimbursement of legal fees will be agreed upon in advance and capped at a specific amount.

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Monthly or Fixed Advisory Fee An advisory fee paid on a monthly basis is a standard fee required in substantially all placement agent engagements. Due to the fixed nature of the overall time commitment required to lead the placement process, the advisory fee compensates the investment bank or placement agent for their exclusive time devoted to the capital raise. The monthly fee can range from $10,000 to $50,000 per month (or more) and is dependent upon the size and complexity of the offering and the reputation of the investment bank or placement agent. Generally, the advisory fee will be capped to not exceed a pre-determined amount.

Placement Fee The placement fee charged is based on the successful closing of an offering transaction. The placement fee aligns the financial interest of the investment bank and placement agent with the company raising the capital since no fee is paid if no capital is raised. Depending upon the total value of the offering completed, a minimum fee may be charged if the expected proceeds received by the company do not surpass a certain threshold. The ultimate fee charged based on a percentage of the gross proceeds received will be based on an overall risk assessment of achieving a successful completion of the offering. As will be outlined later in this article in the section What Factors Determine the Placement Fee Charged, our market survey and independent research identified a series of risk factors that are considered in the ultimate percentage charged for the placement fee. The amount of the placement fee will vary depending upon if the offering is for equity or debt instruments and the overall value associated with the offering. The placement fee percentage will be higher for equity offerings due to the higher risk of successful completion and higher level of effort associated with equity raises.

A Possible Warrant Generally, for early-stage companies or companies experiencing financial difficulties, the investment bank or placement agent may request a low cost or no cost warrant for a specified percentage of the company’s equity

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as a sweetener or yield enhancement for their services. The warrant, like the placement fee, is earned only upon the successful completion of an offering. In many cases, the fact that an investment bank or placement agent is able to lead a successful capital raise results in immediate value creation for the overall enterprise value of the company. Accordingly, the placement agent will wish to participate and have a longer-term upside exit opportunity. The size and value of the warrant are subject to negotiation.

Scope of the Barnes & Co. Market Survey & Independent Research Our survey and independent research fell into two categories. Our first category was for publically-traded companies where we relied upon independent research of SEC Form 8-K and Form 10-K disclosures identifying the investment banking and placement fees charged to specific companies for their placement services. Our second category was for privately-held companies where we relied upon a market survey and telephone interviews with principals of investment banks and placement agent firms to understand the analytical process followed in determining the specific fees to charge.1

Remainder of Page Intentionally Left Blank

1 Barnes & Co. has not applied a statistical methodology to the market survey performed related

to placement fees charged to privately-held firms. Our survey was conducted from a selection of 40 major Wall Street investment banks, middle-market investment banks and small placement agent firms willing to speak publically with us under the conditions of not disclosing the identity of specific firms and individuals. Based on the 50% response rate achieved and the consistency of the range of fees and terms identified in our interviews, we believe the results of the survey support the final conclusions reached in our analysis set forth herein.

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What Factors Determine the Placement Fee Charged? Our market survey and interviews with principals with investment banks and placement agent firms identified a general analytical approach to the

determination of the investment banking and placement agent fees to be charged. Of the three components of compensation paid to an investment bank or placement agent firm, the monthly retainer was generally fixed, but subject to modification depending upon the number of people assigned to the engagement. The placement fee,

which is paid only upon a successful placement of the equity or debt instrument, was based on a risk assessment of the ability to achieve a successful placement. Accordingly, the risk factors considered in quantifying the placement fee included the following:

1. The length of operating history of the company; 2. The size of the company and size of the capital raise; 3. The profitability (or lack of profitability) of the company; 4. The current economic conditions of the capital markets; 5. The current economic conditions of the industry the company

participates; 6. The projected economic prospects of the company and its

competitors; 7. Quality and reputation of company management; 8. Use of proceeds from the capital raise; 9. For secured debt placements, the quality of the collateral being

offered; 10. The type of equity or debt instrument being offered (i.e.,

unsecured debt carries a higher fee than secured debt and common stock may incur a higher fee than preferred stock with quasi-debt like features); and

11. The most likely sources to fund the equity or debt instrument being placed (non-traditional placement sources may incur a higher placement fee.

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Although a general range for the placement fees exists, where along the range is dependent upon the ultimate evaluation by the placement agent of the risk of successfully raising the capital. The evaluation of risk will vary by investment bank and placement agent firm. Many investment banks are highly specialized by industry and type of equity or debt instrument being placed, which may allow them to charge a premium due to their expertise and relationships in having identified the most likely investor for the type of instrument being offered. The assessment of what is a reasonable fee will take into consideration all of the factors identified above, especially when the placement process will generally take from four to six months to complete.

The overall risk assessment by the investment bank or placement agent firm will also impact whether they will demand a fee enhancement in the form of a warrant and what size of warrant. Early stage companies and companies where their financial projections indicate substantial upside in increased value are the most likely firms where a warrant will be demanded. Successful completion of early stage equity and debt financings can add significant value to the company since it increases the probability of the successful execution of the company’s business plan. The size of the equity warrant can range from 2% to 10% and the specific size is dependent upon the overall risk assessment and the evaluation of the added value being added by a successful closing of the capital financing. Our market survey and interviews did not identify a specific process in the evaluation of the size of the warrant. The size of the warrant is generally subject to negotiation between the investment bank or private placement firm and company management. Our research and survey did identify that a warrant within the 3% to 5% was the most common.

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Research Results for Placement Fees for Publicly-Traded Companies For publicly-traded firms, we identified 276 placement transactions for equity and debt instruments that occurred during the four-year time period between June 2013 and June 2017. 2 215 or 78% of the placement transactions identified were for the placement of equity securities, which included placement of either common stock, preferred stock or partnership units. Placement of debt instruments represent 61 transactions or 22% of the transactions identified.

Placement Fees for Equity Instruments by Publicly-Traded Entities For the placement of equity securities, our research identified that the range of cash placement fees charged to publicly traded firms ranged from

2 The SEC Edgar database limits full document searches to the last four-year period.

Accordingly, we limited our analysis to the time period of June 2013 to June 2017

78%

22%

ChartTitle

Placement of Equity Securities Placement of Debt

Distribution of 276 Placement Transactions for Publicly-Traded Companies by TypeFor Period of June 2013 to June 2017

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3% to 9% of the gross proceeds received from an offering. The distribution of the fees charged was fairly concentrated with 61% of the placement fees charged being in the 6% to 7% range. Within this 6% to 7% fee range, 42.1% of the transactions were either exactly 6% or 7%, respectively, with the remaining 15.8% of the transactions being in the middle of the range.

For publicly-traded companies, placement fees for equity securities in the 8% to 9% range represented 49 transactions, or 23% of the fee distribution, of the 215 transactions identified. Gross proceeds for transactions in the 8% to 9% range were generally $15 million or less. The remainder of the placement fees charged fell within the 3% to 5% range. Our review of the overall transaction size of the equity offerings that fell within this lower range were not significantly different in the size of transactions that fell within the 6% to 7% range, indicating the lower placement fee charged may have been subject to other influences such as

13% 3%

61%

23%

ChartTitle

Placement Fee 3% to 3.75% Placement Fee 4% to 5% Placement Fee 6% to 7% Placement Fee 8% to 9%

Distribution of Placement Fee Charged on 215 Transactions: Publicly-Traded Equity SecuritiesFor Period of June 2013 to June 2017

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a stronger negotiating position by the company or the lower percentage may have been a loss leader for future investment banking or placement agent engagements.

Warrants Received in Addition to Placement Fee Our research of the placement of publicly-traded equity instruments identified that an additional warrant was issued in combination with the placement fee in only 8.8% of the transactions, or 19 transactions out of 215. The size of the warrants issued ranged from 5% to 10% with substantially all of the warrants being at the 5% rate. Also, substantially all of the engagements where a warrant was included in the overall compensation incurred a cash placement fee within the 6% to 7% range. Placement Fees for Debt Instruments by Publicly-Traded Entities Of the 61 debt placement transactions identified in our review of publicly-traded entities, the placement fee charged ranged from 0.5% to 7%, with 3% being the average fee generally charged. The size of the fee was inversely proportional to the size of the debt instrument placed. Placement fees for debt instruments between $500,000 to $10 million were in the 3% to 7% range with the placement fee declining with the increasing size of the debt placement. Placement fees for debt instruments in the $25 million to over $125 million were in the 0.5% to 2% range with the placement fee generally declining with the increasing size of the debt placement. We did note a lower placement fee for standard, single bank financing compared to debt placement with multiple investment firms, insurance companies or other sophisticated investor groups. The higher placement fee would be consistent with the analytical process previously discussed since a placement to a single financing source is easier to manage when compared to a placement among multiple investor groups. The risk and effort to get multiple investors to agree on the same terms for the entire capital raise is higher when compared to dealing with a single financing source. Warrants Received in Addition to Placement Fee For placement of debt instruments by publicly-traded entities, our research identified no transactions in the June 2013 to June 2017 time period where a warrant was issued in combination with the placement fee charged.

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Survey Results for Placement Fees for Privately-Held Companies Placement Fees for Equity Instruments of Privately-Held Entities Our survey of the placement fees generally charged for raising equity on behalf of privately-held companies identified a range of placement fees in the 5% to 10% range. Similar to the results identified in the independent research performed for publically-traded companies, approximately 50% of the market survey results identified placement fees in the 6% to 7% range. Our survey identified that the major Wall Street investment banks rarely perform equity raising services for privately-held companies due to minimum fee requirements and the size of the equity capital raise by privately-held companies being generally below $20 million. The placement agent market place for privately-held companies is highly dependent on mid-market investment banks and placement agent firms. Placement Fees for Debt Instruments for Privately-Held Entities Our survey of the placement fees generally charged for raising debt on behalf of privately-held companies identified a range of placement fees in the 0.5% to 5%. Similar to the results identified in our independent research of publically-traded companies, the amount of the placement fee is generally inversely proportional to the size of the debt instrument being placed; however, the fee was also dependent upon the size of the company, type of debt, use of the debt proceeds and financial condition of the company participating in the capital raise. For a “plain vanilla” secured debt negotiation for standard, single bank financing for a company with a lengthy operating history with established profitability, the placement fee ranged from 0.5% to 1%. For secured debt placements with investment funds, insurance companies, non-traditional banks and family offices, the placement fee generally ranged from 2% to 3%, subject to the size of the company, collateral being secured by the financing, financial condition of the company and use of proceeds. Placement fees for secured debt in the 4% to 5% range generally related to debt placements below $5 million and companies with short operating histories and unprofitable operations. Our survey identified that the placement fee for unsecured debt was difficult to quantify due to a large number of company specific factors that required consideration in the overall risk assessment for the placement. Many firms in our survey declined to accept engagements for the

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placement of unsecured debt unless the company could demonstrate a strong balance sheet and cash flow to make the placement effort worth consideration. It was noted that in many cases, convertible debt placements would be considered and the placement fees generally charged would be the same as the placement of equity instruments due to the conversion feature.

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Scott A. Barnes, CPA, CFF, CGMA is the Chief Executive Officer of Barnes & Company who during the past 25 years has assisted corporations, investors and attorneys in assessing the financial issues surrounding complex and sophisticated accounting issues, merger and acquisition transactions, business valuation and industry and competitor analyses. He has extensive experience providing sophisticated commercial damage analyses and expert testimony for clients in a diverse range of industries, especially with respect to forensic analyses, intellectual property infringement, antitrust, lost profits, business interruption, contract disputes, business valuation, fraud, accounting, accounting malpractice and other complex commercial damage issues. He has served on two editorial boards of national publications specializing in economic damages, business valuation and forensic accounting issues and published numerous articles on the subject of economic damages, business valuation and professional standards in the performance of litigation services. He can be reached at sbarnes@barnesco.com

Stewart E. Elliott, Jr. is a Managing Director with Barnes & Company. He has spent his professional career in commercial banking, private equity and venture capital firms based in New York, Texas and California where he specialized in capital structure analysis, corporate finance and the raising of debt and equity capital investment from both financial and public institutions and sophisticated investors. His professional career started at Union Bank of California where he was responsible for the opening and management of the bank’s New York loan production office in conjunction with Standard Chartered Bank. In 1982, he was appointed Senior Vice President and

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Director of Mercantile Bank and Trust Dallas, which became MBank Dallas, where he managed the bank’s structured finance division overseeing leverage buyout, specialty finance venture capital and investment banking operations with $2.5 billion in loans under management. At the time, Mr. Elliott managed one of the largest leverage buyout bank financing operation in the US. He subsequently became a partner with Arthur Andersen & Co., responsible for management of corporate finance and corporate development services in the Southwest region. In 1994, Mr. Elliott became a partner with Hicks, Muse, Tate & Furst’s Crescent Mezzanine Partners Fund where he was responsible for the funds development and the raising of $470 million of institutional investment. Mr. Elliott’s industry experience includes venture capital, private equity, investment banking, commercial banking, technology, alcoholic beverages, defense contracting, vineyards and wine production, import/export, telecommunications, manufacturing, brokerage and securities, hospitality, healthcare, software development, commercial construction, cable television, Internet, transportation, and government. He can be reached at selliott@barnesco.com

About Barnes & Company Barnes & Company is a boutique management consulting firm providing sophisticated financial and economic damage analyses and expert services related to commercial damages, business and intellectual property valuation and fraud investigations. (www.barnesco.com)