The term “private placement” refers to the process of raising capital in an offering that is not registered with securities regulators and is not offered broadly to the public. Private placements can take one of several regulatory pathways to be compliant with the law. Private placements include offering types ranging from friends and family investments in a new retail establishment, to angel investments in a social enterprise, to institutional and venture capital investment in a growth company. Any kind of security can be offered in a private placement, including notes, stock (common or preferred), revenue share securities, convertible notes, SAFEs (security agreement for future equity) or others; and the attributes of each one of these can vary quite a bit (differing rates of return, exit options, valuation, etc.). Below is an overview of some of the regulations related to private placements.
Typically no advertising to or general solicitation of investors. With one exception, the securities offering may not be advertised and the issuer may not generally solicit investors, thus the moniker “private” offering.
Typically only wealthy (accredited) investors. With limited exceptions, investors must be wealthy “accredited” investors. This means that individuals must have $1,000,000 dollars in net worth (excluding their home, cars and furnishings) or earn $200,000 per year (or $300,000 with a spouse) and entities must have net assets of $5,000,000. There are a few other types of accredited investors permitted too, including officers and directors of the issuer and banks, among others
Types of disclosures. The types of disclosures that the issuing company should make to potential investors vary depending on the type of investors, the regulatory pathway chosen, and the risk tolerance of the issuer. At a minimum, a term sheet is provided and a investor agreement describes the final terms. In other cases, it is prudent to provide an offering memorandum with risk disclosures. If nonaccredited investors are included in the offering, more thorough disclosures are often required. And, with one regulatory approach, disclosures at least as detailed as those done for registered securities (such as IPOs) are required if the offering is made to nonaccredited investors.
Resale restricted. Because private placement securities are not registered, they are considered “restricted” securities and cannot be resold without registration or an exemption from registration which can make them harder to sell (illiquid).
Final thoughts. We have just touched the surface of the broad rules governing private placements. Read more about the specific pathways here. We can help you map out a strategy that works for your business plan and fits your potential investor network. Contact us for a free consultation.