Private Placements are a type of securities offering used to raise capital for a venture or company. A private placement securities offering is not sold through a public offering nor on any exchange, but rather through a private offering, mostly to a small number of investors. Private placements are significant to capital formation in the United States. For instance, more than two-thirds of all debt issuances are privately placed.
Privately placed securities do not have to be registered with the Securities and Exchange Commission (SEC) if the issuance of the securities conforms to a registration exemption as set forth in the Securities Act of 1933 and SEC rules promulgated thereunder. Most private placements are offered under the rules known as Regulation D. Common exemptions from the Securities Act of 1933 allow an unlimited number of Accredited Investors (as defined by the SEC) to purchase securities in an offering.
An Accredited Investor may be a natural person or an entity such as a bank, partnership, corporation, or a trust.
For a natural person, an accredited investor includes anyone who:
- earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, or
- has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence.
The following non natural persons may be accredited investors:
- any trust, with total assets in excess of $5 million, not formed specifically to purchase the securities in question, whose purchase is directed by a sophisticated person, or
- any entity in which all of the equity owners are accredited investors.
In most cases, all investors must have sufficient financial knowledge and experience to be capable of evaluating the risks and merits of investing in a company.
What Is a Private Placement Memorandum?
When you are looking to do a private offering, a private placement memorandum (PPM) is the legal document prepared for distribution to prospective investors. It is sometimes referred to as an offering memorandum or offering document. The basic notion behind the PPM is to fully inform the prospective investor about all aspects of your business, management, prior financial performance, and future prospects, as well as the risks involved.
Who May Benefit From a Private Placement?
- A startup looking to raise capital
- Businesses with large investment needs
- Real Estate developers and entrepreneurs
- Investors interested in privately investing in a company.
If you are interested in using a securities offering to raise capital for a venture or company, call or email us to schedule a consultation to discuss the costs, timeline and regulatory considerations involved in a private placement or fund formation.