What is a Private Placement?
Private placement programs offer funding
opportunities for company’s looking for capital.
Here are some essential to consider when it
comes to investing private placements.
Businesses who seek funding for growth or expansion might consider a private placement over other
types of funding, like venture capital or a public offering. Private placement is when a company sells
securities directly to a small number of investors instead of making a public offering on open market.
A private placement program is often a better choice for businesses that aren’t ready for a public
offering, but have passed the angel investor stage. A private placement allows the business to raise a
significant amount of capital, but bypass many of the requirements that other security offerings must fill.
Under SEC Regulation D, private placements don’t have to be registered with the SEC and the business
can waive the need for a prospectus as long as the placement follows certain other rules. Private
placements are easier to offer and allow the company to raise capital quickly. With a private placement,
businesses can accomplish their funding goals and maintain their private status.
Venture capital investments are another way for businesses to raise capital. However, venture capitalists
have more say in company decisions and more short-term repayment demands. Private placement
investors, on the other hand, don’t have as much say-so in company operations and do not expect to see
short-term returns on their investment.
A Few Rules
Businesses offering a private placement aren’t allowed to make general advertisements or solicitations.
That means the private placement can’t be listed on the internet, advertised in the newspaper, or
otherwise marketed to people you don’t know. Instead, they’re required to make the offering directly to
investors. Companies should only offer the private placement to a small number of investors. The general
public typically doesn’t find out about a private placement until it’s already happened.
Private Placement Memorandum
Companies offering a private placement issue a
private placement memorandum, PPM, that details the
company’s finances and business plan. Prospective
investors can review this document to decide whether
they should invest money in the private placement. While
it does provide information about what you’re investing in,
it’s not as detailed as the prospectus you’d receive from
other types of investments and it’s not regulated.
Investing in a Private Placement Program
Private placements are less liquid than public stock
purchases. Also, investors may need to be accredited to
qualify for these investments. That means the investor
should have a net worth greater than $1 million and an annual income above $200,000 for the last two
years, $300,000 for joint investors. Accredited entities, e.g. companies, should have at least $5 million in
assets. Investors should also be sophisticated and knowledgeable about securities before investing in
private placements. It’s in the business’ best interest to deal with accredited investors since these
individuals are more likely to understand the risk associated with a private placement. Other investors
may become disgruntled later if they don’t receive the returns they expected. Private placement offerings
have significant risks that should be evaluated and understood.
Investors can do a little bit of due diligence by checking with your state securities commission to make
sure the broker or issuer is licensed to do business with your state. You can also use the office to find out
if that person’s had any problems. FINRA’s BrokerChecker will give you the disciplinary record of
registered brokers and firms. FINRA, the Financial Industry Regulatory Authority, requires brokers and
firms to investigate the private placements that are sold and those who don’t uphold standards. Brokers
and firms, often those seeking high commission fees, sometimes sell private placements to investors
who don’t meet the qualifications.
Private placements can be extremely profitable, especially if the company eventually goes public.
However, an investor shouldn’t make a decision based on the company’s promises to go public in the
future. That’s a step that may not happen depending on the company’s performance.
Copyright © 2011 The Money Alert.com. All rights reserved.
All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security or instrument or to
participate in any particular trading strategy. The Money Alert does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any
information prepared by any unaffiliated third party, whether linked to this web site or incorporated herein, and takes no responsibility. All such information is provided solely for
convenience purposes only. The Money Alert is not affiliated with any of the firms or entities listed unless specifically stated. The Money Alert does not provide investment, tax or legal
advice. Please consult the appropriate professional regarding your personal situation.