Private Placement
A private placement is the sale of securities directly to a limited number of sophisticated investors without a public offering, typically exempt from SEC registration under Regulation D.
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Exam Tip
Private placement = Reg D exemption. Know accredited investor definition ($200K/$300K income OR $1M net worth). Rule 506(b) vs 506(c)!
What is a Private Placement?
A private placement is a capital-raising method where securities are sold directly to select investors rather than through a public offering. These offerings are typically exempt from full SEC registration, making them faster and less expensive than public offerings.
Private Placement vs. Public Offering
| Feature | Private Placement | Public Offering |
|---|---|---|
| Investors | Limited, accredited | General public |
| Registration | Exempt (Reg D) | Full SEC registration |
| Disclosure | Limited requirements | Full prospectus |
| Cost | Lower | Higher |
| Speed | Faster | Slower |
| Liquidity | Limited resale | Freely tradeable |
Regulation D Exemptions
| Rule | Description | Limit |
|---|---|---|
| Rule 504 | Small offerings | Up to $10 million |
| Rule 506(b) | Unlimited amount, no general solicitation | Up to 35 non-accredited |
| Rule 506(c) | Unlimited amount, general solicitation allowed | Accredited only, must verify |
Accredited Investor Definition
| Criteria | Requirement |
|---|---|
| Income | $200K+ individual or $300K+ joint (2 years) |
| Net Worth | $1M+ excluding primary residence |
| Professional | Licensed Series 7, 65, or 82 holders |
| Entity | $5M+ in assets or all accredited owners |
| Knowledgeable Employee | Of private fund issuer |
Private Placement Memorandum (PPM)
Although not required like a prospectus, PPMs typically include:
- Business description
- Risk factors
- Use of proceeds
- Management information
- Financial statements
- Subscription agreement
Resale Restrictions
| Rule | Effect |
|---|---|
| Rule 144 | Governs resale of restricted securities |
| Holding Period | 6 months (reporting) or 1 year (non-reporting) |
| Legend | Stock certificates marked "restricted" |
Common Private Placement Investors
| Investor Type | Examples |
|---|---|
| Institutional | Pension funds, endowments |
| Venture Capital | VC and PE firms |
| Hedge Funds | Alternative investment funds |
| Family Offices | Wealthy family entities |
| Accredited Individuals | High-net-worth investors |
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Regulation D (Reg D)
Regulation D provides exemptions from SEC registration for private placements, allowing companies to raise capital by selling securities to accredited investors without the cost and time of a full public offering.
Rule 144
Rule 144 provides a safe harbor for selling restricted securities and control securities, specifying holding periods, volume limitations, and filing requirements for legally reselling these securities.
Primary Market
The primary market is where new securities are issued and sold for the first time, with proceeds going directly to the issuing company or government—including IPOs and new bond offerings.
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