Private Placement Offerings

A private placement offering is the sale of a company's stock to private investors without the use of public market exchanges. The end result is the same as a public sale of stock (i.e. the sale of stock to the private investor), but unlike a public offering, a private placement offering doesn't require the registration of securities with the Securities and Exchange Commission (SEC). While less regulated, there are still restrictions on unregistered offerings that are not inherent in a "public" sale of securities, including limits on the dollar amount of stock that may be sold and the types of investors who can purchase the stock. Read on to learn more about private placement offerings to see whether they may be useful for your corporate clients.


How Are Private Placement Offerings Made?

Private placement offerings are usually guided by an offering memorandum or private placement memorandum. These are very similar to a prospectus and are distributed to potential investors before the actual sale of securities. They normally contain a wide range of information about the seller, including its:

  • History
  • Key employees
  • Financial statements
  • Primary products/services
  • Competitors
  • Marketing strategy

These memorandums aren't required by the SEC and aren't typically reviewed by regulators. However, it's important for your clients to understand that such transactions are still subject to anti-fraud laws.

Requirements for Private Placement Offerings

Although private placement offerings are exempt from the general rule requiring SEC registration of securities for sale, they are still subject to certain SEC rules under Regulation D, specifically, SEC Rules 504, 505 and 506.

For sales under Rule 504, up to $1 million worth of certain securities can be sold per year without facing specific disclosure requirements and there is no limit on the number and type of investors that can purchase the securities.

Under Rule 505, the sale limit is $5 million per year and there are restrictions on certain types of investors that can purchase the securities. For accredited investors, there are no limits on the number of purchasers, but companies may not sell to more than 35 non-accredited investors. Under this rule, companies selling to non-accredited investors must make certain disclosures, include financial statements, and provide the same information to accredited and non-accredited investors.

Rule 506 offerings don’t have annual dollar limits, but do have the same investor restrictions as Rule 505, as they are limited to 35 non-accredited investors who must receive certain disclosures. However, these offerings require that any non-accredited investors be financially sophisticated enough to evaluate the investment. This can be satisfied where a non-accredited investor uses a purchaser representative in the transaction. Also, companies can generally advertise their offerings under this rule, but if widely advertised, they can only sell to accredited investors and the company must take reasonable steps to verify their accredited status.

While no SEC registration is required, if your client opts for private placement offerings, they are still required to file an SEC Form D within 15 days of sale.

What's The Benefit of Private Placement Offerings?

A private placement offering can be very useful especially for small to mid-sized businesses seeking a more efficient infusion of capital. After all, these offerings can be done at a fraction of the costs incurred in SEC registration for public sale and with fewer regulatory restrictions as sellers are not subject to minimum size requirements or more comprehensive disclosure mandates.

As noted above, the drawbacks of a private placement offering is that there are certain investor and dollar amount restrictions. Also, because there is no public market for the stock, the investor pool may be smaller which can be compounded by a potential investor's perception that the stock may not be readily liquidated and by their overall concern of the risks in purchasing unregistered securities.

Looking Ahead

Even though unregistered securities are less regulated, your clients should still be as transparent as possible with potential investors to assuage their risk concerns and to avoid litigation. Also, if your client has purchased unregistered securities and is seeking to resell them, there are certain procedures that must be followed, including procedures that may allow the securities to be converted for public sale.

For more free information on securities exchanges and representing corporate clients in general, see FindLaw's Corporate Counsel section.

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