I'm trying to georeference CAD to a building footprint in ArcMap 10 (although I've had this same problem in earlier versions). The problem is, it won't let me use more than two control point links, so I have to update the display before adding two more. Every time I update the display, the CAD is stretched and placed properly where the control points were, but the other ends of the CAD are off. Is this simply something I'll have to live with? Or is there a way I can use more control points, or possibly convert the CAD to a less restricted file format?
I believe you are indeed limited to two control points with CAD data. Here is a possible work around. Convert the CAD data to a shapefile (or geodatabase), then use the spatial adjustment tools to georeference the vector data.
2 Control 'Links' max, but 4 Control Points can be achieved...
"Control points define the source and destination coordinates used to georeference a CAD dataset. A maximum of two links are permitted. Each link comprises two points: a from-point at a known location on the CAD dataset, and a to-point at the intended new location of the reference feature. By default, snapping is enabled in ArcMap and can be used to align specific geometric features"
Click the Georeferencing drop-down arrow, then click Update Georeferencing to update the display and save the transformation data to a world (.wld) file
(.wld world files can be edited manually.)
though as Todd suggests its better to geo-reference in ESRI native formats (shape or geodatabase)