subject: Definition Of Private Placement [print this page] A private placement is an offering of equity to institutions or individuals which meets federal requirements exempting the offering from registration with the SEC. The US government made this possible through Regulation D, part of the Securities Act of 1933 created in the aftermath of the stock market crash. Reg. D allows businesses to sell shares and equity instruments to informed investors without the extreme red tape of SEC registration if they meet certain requirements.
Private Aspect
To be exempt from SEC registration, the private aspect of the offering is a key element. This generally means that public solicitations (such as listing on an open market or advertising through a form of mass media) are forbidden. Instead, the potential investors must be previously known by the business owners or found through personal contacts and networking.
Restricted Shares
Under many of the exemptions within Regulation D, it is required that shares are purchased primarily as longer-term investments rather than for immediate resale on a secondary market. Some rules state that the shares purchased cannot be resold for two years. This requirement forces investors in private placements to be more diligent about what they are purchasing to be sure that it will be a profitable investment in the long run.
Accredited Investors
Also, most exemptions under Regulation D require that all or most investors in the private placement be what are called accredited investors. There is no formal accreditation with the government. These investors are generally institutions and individuals who are expected to be sophisticated when it comes to business investment deals. This includes, but is not limited to, institutions, like banks, business development companies, and registered investment companies, officers or partners of the company selling the shares, and individuals whose net worth is over $1 million or annual income is over $200,000.
Private Placement Memorandum
Whether or not the business is required to present disclaimers to investors (some Regulation D exemptions do not require this) it is in the best interest of the business creating the private placement to do so through a private placement memorandum. This document presents the potential risks of the investment along with its specific terms and a subscription agreement for interested investors to move forward. The document may contain aspects of a business plan or have a business plan as an appendix. The PPM can help the company defend against claims of fraud for not disclosing the investments risks.
by: Eric Powers
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