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Private Placements

Posted on October 6, 2010 by John Fischer

Private placement (private investment capital), are funds invested in a company from private investors in the form of stocks or bonds.  Private placement is a convenient way to gain capital.

Pro’s:

  • Do not require the assistance of brokers or underwriters
  • Considerably less expensive and time consuming, than a public offering
  • Makes gaining capital possible for more risky ventures or start-up firms
  • Enables small business owners to hand0-pick investors with common interests
  • Common interest investors can use their experience to assist the venture in gaining success
  • In the United States, private placements do not have to be registered with the SEC

Con’s:

  • Suitable investors can be difficult to find, especially in multiple states
  • Privately placed securities are often sold way below their market value
  • Companies using a private placement may have to hand over more equity because of the greater risk being taken on by their investors.

There are rules and regulations about who can invest in a private placement, how much an investor can earn through a private placement, and in how many private placements an investor may be involved. These rules are specified in the 1933 Securities Act, Section 4(2) & Regulation D.

Section 4(2) exempts companies wishing to sell under $5 million in securities to a small number of accredited investors from registering with the SEC.  Businesses taking advantage of private placements are required to:

  • Only seek investments from current company managers or accredited investors who have a pre-existing relationship with the company
  • Provide potential investors with recent financial statements
  • Provide potential investors with a list of risk factors associated with the investment
  • Invite potential investors to inspect their facilities

Regulation D of the 1933 Securities act was adopted in 1982 and has been revised several times since then.  It consists of six rules (numbered 501 through 506).

Rule 501 – 503: Define an Accredited Investor, Explain the conditions of a private placement, and establish other conditions that apply throughout the bill.

Rule 504: provides an exemption from the registration requirements of the federal securities laws for some companies when they offer and sell up to $1,000,000 of their securities in any 12-month period.

Rule 505: allows some companies offering their securities to have those securities exempted from the registration requirements of the federal securities laws. To qualify for this exemption, a company:

  • Can only offer and sell up to $5 million of its securities in any 12-month period;
  • May sell to an unlimited number of “accredited investors” and up to 35 other persons who do not need to satisfy the sophistication or wealth standards associated with other exemptions;
  • Must inform purchasers that they receive “restricted” securities, meaning that the securities cannot be sold for six months or longer without registering them; and
  • Cannot use general solicitation or advertising to sell the securities.

Rule 506: is considered a “safe harbor” for the private offering exemption of Section 4(2) of the Securities Act. Companies using the Rule 506 exemption can raise an unlimited amount of money. A company can be assured it is within the Section 4(2) exemption by satisfying the following standards:

– The company cannot use general solicitation or advertising to market the securities;

– The company may sell its securities to an unlimited number of “accredited investors” and up to 35 other purchases. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated—that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;

– Companies must decide what information to give to accredited investors, so long as it does not violate the anti-fraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well;

– The company must be available to answer questions by prospective purchasers;

– Financial statement requirements are the same as for Rule 505; and

– Purchasers receive “restricted” securities, meaning that the securities cannot be sold for at least a year without registering them.

At Salesleads.tv, we can provide leads to accredited investors, many who have a proven history of private placement investments.  Private placement is a very effective way to acquire the capital you need to start a company, but be sure to mind your P’s and Q’s so the end result is positive for everyone involved!

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This entry was posted in Compliance, Investing, Lists, Private Placements and tagged Investments, Investors, Private Placements Articles, Regulation D, SEC Rules, SEC Section 4(2). Bookmark the permalink.
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