Who Can Buy A Private Placement?

Who Can Buy A Private Placement

A Private Placement is a common method of raising business capital by offering equity shares. Private placements can be done by either private companies wishing to acquire a few select investors or by publicly traded companies as a secondary stock offering. Private placement is also referred to as an unregistered offering. While an IPO requires a company to be registered with the Securities and Exchange Commission (SEC) before it sells securities, a private placement is exempt from that requirement. A private placement might take place when a company needs to raise money from investors. Yet it is different from taking money from other private investors, like venture capitalists. It’s still regulated by the Securities and Exchange Commission (SEC), but under different rules, collectively known as Regulation D. Reg D allows companies to issue securities based on the investors buying them. It distinguishes between accredited and non-accredited investors, as defined by the SEC. Any number of accredited investors can take part in private placements.

Though private placements can issue securities to non-accredited investors, only 35 such investors can be included. If you’re looking to invest in a private placement as an accredited investor, you’ll need to meet some requirements, including:
• A net worth of over $1 million (either independently or with a spouse).
• Earned income more than $200,000 a year (or $300,000 with a spouse).
However, private placement does exist for the small business owner and is often less expensive and easier than taking your company public. And, in the United States, private placement often does not need to be registered with the Securities Exchange Commission. Regulation D is the most popular form of non-public private placement. When a publicly-traded company issues a private placement, existing shareholders often sustain at least a short-term loss from the resulting dilution of their shares. However, stockholders may see long-term gains if the company can effectively invest the extra capital obtained and ultimately increase its revenues and profitability.

Understanding Private Placement

Private placement is an issue of stock either to an individual person or corporate entity, or to a small group of investors. Investors typically involved in private placement issues are either institutional investors, such as banks and pension funds, or high-net-worth individuals. A private placement has minimal regulatory requirements and standards that it must abide by. The investment does not require a prospectus and, quite often, detailed financial information is not disclosed. For an individual investor to participate in a private placement offering, he must be an accredited investor as defined under regulations of the Securities and Exchange Commission (SEC). This requirement is usually met by having a net worth in excess of $1 million or an annual income in excess of $200,000. Private placement can offer investors an exclusive opportunity that isn’t available to the public. It can also offer companies funding without requiring them to register with the SEC or disclose a lot of financial information. However, all investments carry risk. Though still covered by antifraud portions of securities laws, private placements can withhold more information than investors than public offerings. Companies should know that non-accredited investors still require financial disclosures. Meanwhile, potential investors should consider gathering information beyond what’s offered before sinking their money into a private placement.

Private Placement and Share Price

If the entity conducting a private placement is a private company, the private placement offering has no effect on share price because there are no pre-existing shares. With a publicly-traded company, the percentage of equity ownership that existing shareholders have prior to the private placement is diluted by the secondary issuance of additional stock, since this increases the total number of shares outstanding. The extent of the dilution is proportionate to the size of the private placement offering. For example, if there were 1 million shares of a company’s stock outstanding prior to a private placement offering of 100,000 shares, then the private placement would result in existing shareholders having 10 percent less of an equity interest in the company. However, if the company offered an additional 1 million shares through the private placement, that would reduce the ownership percentage of existing shareholders by 50 percent.

Motivation for Private Placement

The dilution of shares commonly leads to a corresponding decline in share price—at least in the near-term. The effect of a private placement offering on share price is similar to the effect of a company doing a stock split. The long-term effect on share price is much less certain and depends on how effectively the company employs the additional capital raised from the private placement. An important factor in determining the long-term share price is the company’s reason for the private placement. If the company was on the verge of insolvency and did the private placement as a means of avoiding bankruptcy, it would not bode well for the company’s shareholders. However, if the motivation for the private placement was a circumstance in which the company saw an outstanding opportunity for rapid growth that simply required additional financing, then the eventual extra profits realized from the company’s expansion may push its stock price substantially higher. Another possible motivation for doing a private placement could be that the company cannot attract large numbers of institutional or retail investors. This might be the case if the company’s market sector is currently considered unattractive, or there are only a few analysts covering the company.

Benefits of Private Placement

• High degree of flexibility in the amount of financing ranging from $100,000 to $10 to $20 million dollars consisting of combinations of debt, equity, or debt and equity capital.
• Investors are more patient than venture capitalists, often seeking 10 percent to 20 percent return on investments over a longer term of 5 to 10 years.
• Much lower costs than approaching venture capitalists or selling the stock to the public as an IPO (Initial Public Offering).
• A quicker form of raising money than usual venture capital markets.
Who Is a Candidate for Private Stock Offerings?
The ideal small business candidate is a company that’s in the third stage of finance and is looking for growth or expansion funding. Small business owners might think private placement applies to start-ups when the company has completed product development and conducted a market-feasibility study and business planning but start-up funding often comes from angel investors.
Where You Can Find Private Placements?
The money from private placements can come from accredited investors defined by the SEC Rule 501 under Regulation D as:
• An individual earning $200,000 per year
• A household with an income of $300,000 per year or a household with a net worth in excess of $1 million dollars
• Venture funds, some banks, and other institutions
To find these private placements, connect with bankers, attorneys, and accountants who can network your small business with the right private investor.

What You Need for a Private Placement?

• You need a sound business plan.
• You should have a private placement memorandum (PPM) disclosing the full facts surrounding the investment and business.
• You’ll need a law firm or lawyer that’s experienced in private placements.
With the limited infusion of capital into the stock market, the private investor market is an attractive alternative for investors and small businesses. Private placement offers a viable form of business financing without the constraints of taking a company public and conceding control.

How Private Placement of Securities Works

A company can be more selective about who buys its shares if it sells them in a private placement. Shares sold in an initial public offering or IPO, are offered to the general public and tend to attract more attention. However, private placement allows a company to raise money without going public and having to disclose financial information. A company can remain private while still gathering shareholder investments.

Restrictions of Private Placements

There are some limitations of private placements, especially when it comes to what types of investors are allowed to participate. A number of rules within the SEC’s regulation D cover those restrictions.

Rule 504

Issuers can offer and sell up to $1 million of securities a year to as many of any type of investor as you want. They aren’t subjected to disclosure requirements.

Rule 505

This rule says issuers can offer and sell up to $5 million of securities a year to unlimited accredited investors and 35 non-accredited investors. If you’re selling to a non-accredited investor, you’ll need to disclose financial documents and other information. With accredited investors, the issuer can choose whether or not to disclose information to investors. But if you provide that information to accredited investors, you must also share that information with their non-accredited ones.

Rule 506

An unlimited amount of money can be raised if the issuer doesn’t participate in solicitation or advertising. While an unlimited amount of accredited investors can be brought in, 35 non-accredited can take part if they meet specific criteria. They need to have enough financial knowledge or have a purchaser representative present to understand and evaluate the investment.

A private company can issue shares via:
• Private placements
• Right issue or bonus issue
• If any company want to issue shares to general public, via IPO it should be converted into public company

Requirements for Private Company for Private Placement

As per Section 23 of the Companies Act, 2013 a private company may issue shares by:
• An offer of private placement can be made to a maximum of 200 individuals in a single financial year.
• The value of the investment should be at least INR 20,000 (on the face value of the securities).
• A private placement letter is sent to applicants (coded with serial numbers) electronically or in writing.
• In the case of issue of shares, a special resolution needs to be passed by the existing shareholders. (Form MGT 14)
• The value of the shares should be certified by a Chartered Accountant (CA) with at least 10 years of experience.
• The payment for securities should be made directly from the bank account for the individual subscribing.
• Securities should be allocated within 60 days of receipt of the application money. If securities are not allocated (because of oversubscription or inability to raise enough capital), then the application money should be refunded within 15 days post the expiry of 60 days. If a company still fails to do so, then the company is liable to pay a 12% interest on the application amount.

The company must file the following with the Registrar of Companies:
• PAS-3 (The return of security allotment within 30 days of allotment)
• PAS-4 (Private placement offer letter)
• PAS-5 (Complete record of private placement)
Way of Rights Issue
As per Section 62 of the Companies Act, 2013 right shares can be offered to:
• Employees under Employee Stock Options (ESOPs) by way of passing a special resolution.
• Any person authorized by way of passing a special resolution.
• To existing shareholders based on the Articles of Association. Shareholders are given 15-30 days to accept right issue.

Preferential Allotment

Preferential allotment is the allotment of shares to a select group of people on a preferential basis. This does not include an offer of shares through a public issue, right issue, bonus issue, ESOP, etc. The issue of preferential allotment should be authorized and stated in the Articles of Association of the company. The issue of shares should be fully paid up at the time of allotment. Preferential allotment should be made within 12 months of passing the special resolution. The valuation of shares will be valued by a registered valour.

Conversion of Loan or Debentures into Shares

By passing a special resolution, a company can convert its loans or debentures into shares. For shares to be convertible, a term has to be attached to the loan or debentures permitting the company to convert them into shares.

Bonus Issue

Bonus issue of shares should be authorized by the Articles of Association. A resolution needs to be passed at a general meeting. All existing shares must be paid-up fully. The company has not defaulted in any repayments (statutory dues, debt securities or fixed deposits). Bonus issue can be made from Capital Redemption Reserve, free reserves and security premium accounts. Once a bonus issue is announced, it cannot be nullified or withdrawn.

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It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!

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84088 United States

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What Is An Exempt Security?

What Is An Exempt Security

Exempt securities are not typically financial instruments sold by publicly-traded companies or the government to investors. The revenue from the sale of securities is used as a means of raising capital. Many of these instruments must be registered with the SEC and abide by the provisions of the Securities Act of 1933. In short, the Securities Act of 1933 does a couple of things. It requires that a publicly held company disclose full financial information and that the information is truthful. However, not every security issuance must register with the SEC. Certain types of securities can be granted an exemption from full filing requirements. Exempt securities, under Section 4 of the Securities Act of 1933, are financial instruments that carry government backing and typically have a government or tax-exempt status. Securities that do not need to be registered with the SEC under the Security Act of 1933 or the Securities Exchange Act of 1934. Examples of exempt securities include small issues, agency securities, most other debt instruments issued by the federal or a local government, and issues made only in a single state. Private placements are also usually exempt from registration.

Securities Exempt from Registration

There are many securities which are exempt from the Securities Act of 1933—requiring neither registration nor a prospectus. There are several reasons why securities may be exempt from registration requirements:
• the securities are considered safe because they are issued by a government authority, such as US Treasuries or municipal bonds;
• the sale of the securities is restricted to a given geographic area, usually within a state; or
• the securities are sold to accredited investors, either wealthy individuals or institutions who are considered to have the wherewithal and expertise to manage their money and to avoid fraudulent schemes.

Tax-Exempt Security

A tax-exempt security is an investment in which the income produced is free from federal, state, and/or local taxes. Most tax-exempt securities come in the form of municipal bonds, which represent obligations of a state, territory or municipality. For some investors, U.S. Savings Bond interest may also be free from federal income taxes.

How a Tax-Exempt Security Works?

Income, such as dividends and interest, on tax-exempt securities does not have federal tax applied to it. Depending on where the investor lives, a tax-exempt security may be free from all taxes. An in-state resident will usually receive a state and federal tax exemption on general obligation bonds from his or her home state. While municipal bonds are the most common references of tax-exempt securities, mutual funds that invest in municipal bonds, U.S. Savings Bonds, or other tax-exempt securities can also receive tax-exempt status. Federal government bonds, namely the U.S. Savings Bond and Treasury Inflation Protected Securities (TIPS), are taxed at the federal level, but exempt from state and local taxes.

Exempt Transaction

An exempt transaction is a type of securities transaction where a business does not need to file registrations with any regulatory bodies, provided the number of securities involved is relatively minor compared to the scope of the issuer’s operations and that no new securities are being issued. Exempt securities are the instruments used that the government backs, which have tax-exempt status. An exempt transaction is a securities exchange that would otherwise have to register with the Securities and Exchange Commission (SEC) but does not because of the nature of the transaction in question.

How an Exempt Transaction Works?

Exempt transactions cut down the amount of paperwork needed for relatively minor transactions. For example, it would be a big hassle to perform a filing with the SEC every time a non-executive employee wanted to sell back some of the company’s common shares he or she purchased as part of an employee stock purchase plan.

Types of Exempt Transactions

A private placement or Reg D offering is a type of exempt transaction in which the securities are not offered to the public, but are instead sold privately to an accredited investor. According to the SEC, an accredited investor can be:

• An insurance company, bank, business development company, small business investment company, or registered investment company
• An employee benefit plan administered by a bank registered investment company, or insurance company
• A tax-exempt charitable organization
• Someone with at least $1 million in net worth, excluding his or her primary residence
• A person with more than $200,000 in income, or joint income of more than $300,000 with a spouse in both of the previous two years
• An enterprise owned by accredited investors
• A general partner, executive officer, or director of the company selling the securities
• A trust with assets of at least $5 million, as long as it has not been formed just to buy the securities in question.

Other types of exempt transactions include Reg A offerings, also known as small business company offerings, which permit the issuing company to raise no more than $5 million in 12 months. This allows smaller companies to access securities markets to raise capital. Rule 147 offerings, or intrastate offerings, are also exempt. Transactions with financial institutions, fiduciaries, and insurance underwriters may be considered exempt. Unsolicited orders, which are those executed through a broker at the request of his or her client, are also considered exempt. Usually, an exempt transaction involves a small amount of money or an accredited or sophisticated investor, or does not, for some other reason, warrant a full registration. However, even exempt transactions are subject to some regulations, such as anti-fraud provisions. Investors and companies can still be held liable to misleading or false statements made on behalf of the company, the offering, or the securities, even if the transaction is exempt. And while exempt transactions may not need to be registered with state securities regulators, those state authorities retain the authority to investigate fraud, collect associated state fees, and enforce state filing requirements. Therefore, companies should take care to remain in compliance with state securities regulations, even if their offerings and transactions are exempt under federal filing regulations.

Types of Exempt securities

Certain securities are exempt from the registration requirements under the Securities Act of 1933. Either these securities come from issuers that have a high level of creditworthiness, or another government regulatory agency has some sort of jurisdiction over the issuer of the securities. These types of securities include:

• Securities issued by the U.S. government or federal agencies
• Municipal bonds (local government bonds)
• Securities issued by banks, savings institutions, and credit unions
• Public utility stocks or bonds
• Securities issued by religious, educational, or nonprofit organizations
• Notes, bills of exchange, bankers’ acceptances, and commercial paper with an initial maturity of 270 days or less
• Insurance policies and fixed annuities

Fixed annuities are exempt from SEC registration because the issuing insurance company guarantees the payout. However, variable annuities require registration because the payout varies depending on the performance of the securities held in the separate account.

Government Securities

U.S. government securities—Treasuries—and municipal bonds are all exempt from registration.

Intrastate Offerings

An intrastate offering is an offering made only to the residents of a state by a corporation in that state. The offering must be registered in the state, and it must comply with SEC Rule 147:
• the issuer is incorporated in the state;
• at least 80% of the issuer’s revenues must come from business within the state,
• at least 80% of the issuer’s assets must be located in the state,
• at least 80% of the proceeds of the offering must be used in the state;
• buyers of the offering must be state residents or an entity owned by state residents.
Resale is permitted only:
• to other state residents;
• or to other buyers only after 9 months after the termination of the Rule 147 offering;
• and the certificates and offering document must specify these resale restrictions.

Life Insurance

Most life insurance contracts are exempt, except for those contracts that have investment risk, such as variable life policies and variable annuities.

Commercial Paper and Bankers Acceptances

Commercial paper is exempt from registration if its term is 270 days or less; and banker’s acceptances, if the term 180 days or less.

Regulation A

Regulation A of the Securities Act of 1933 (aka Reg A) exempts small offerings of securities from the regular SEC registration if these conditions are met:
• The public offering is not for more than $5,000,000 within a 12-month period.
• The offering statement, which is a simplified disclosure document, must be filed with a Regional Office of the SEC at least 10 days before the issue is offered for sale.
• The offering circular, which, like the prospectus, provides full disclosure, must be sent to each buyer of the issue at least 48 hours before the confirmation of the sale.
• The offering circular must be revised if the issue is still being offered 9 months after the initial issue, and the issuer must file a sales report of the issue with the Securities and Exchange Commission (SEC) every 6 months until the offer is terminated.

Private Placements

A private placement is the sale of securities to wealthy or sophisticated investors but not to the general public. Private placements are exempted from SEC registration under Regulation D of the Securities Act. Some broker-dealers — sometimes referred to as private placement agents — specialize in private placements. Nonetheless, private placement agents are required to be registered by the SEC even though the securities that they sell are usually exempt from registration requirements.

Regulation D

The details of Reg D are explained in Rules 501 to 506. No public advertisements or solicitations for a Reg D issue are allowed. A tombstone ad may provide notice of the completion of an offering, but not the offering itself.

Rule 501: Definition of an Accredited Investor

Securities are exempt if sold to accredited investors, who are basically individuals or institutions that have a lot of money and the financial wherewithal to invest in risky unregistered securities. Accredited investors include:
• corporations, partnerships, or other organizations:
o financial institutions;
o with more than $5,000,000 of assets:
o corporations and partnerships, not formed expressly for this investment;
o non-profit organizations;
o any entity owned entirely by accredited investors;
• individuals or married couples
o corporate or partnership insiders;
o with assets worth more than $1,000,000;
o or individuals who earned at least $200,000, or $300,000 for a married couple, in the last 2 years, and expect to make at least the same amount in the current year.

Although the SEC does not require that a disclosure document be offered to accredited investors, the issuer will usually provide a Private Offering Memorandum instead. After all, even accredited investors want to know some details about what they are investing in. A non-accredited investor, who the law presumes does not have sufficient knowledge of financial matters to evaluate the risks and merits of a private placement, must have a purchaser representative who does have the necessary expertise to evaluate any private placement that a non-accredited investor is considering. A purchaser representative may not be affiliated with the issuer unless he is related to the investor.

Rule 503 — Form D

The issuer must file a Form D within 15 days after the commencement of a Reg D offering.

Rule 504

A non-reporting company can raise up to $1,000,000 from any number of individuals, accredited or not, without a SEC registration.

Rule 505 — Purchaser Limitation Rule

A corporation can raise up to $5,000,000 within a 12-month period from any number of accredited investors, but no more than 35 non-accredited investors. A non-accredited investor is anyone or organization who is not an accredited investor. However, a married couple counts as 1 non-accredited investor, as well as any purchase of issues under the Uniform Gifts to Minors Act (UGMA) for their dependent children. A partnership that was not formed for a Reg D investment is considered 1 non-accredited investor; if the partnership was formed expressly for this investment, then the number of non-accredited investors depends on the status of each partner.

Rule 506 — Investment Sophistication

The dollar limitation of Rule 505 can be waived if the non-accredited investors are sophisticated investors who have had prior experience with a Reg D offering, or they are represented by a purchaser representative who has, such as an investment adviser, accountant, or attorney.

Rule 502

Rule 502 restricts general solicitation or advertising for a private offering, stating specifically that “neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising….” This rule may apply if the media finds out about the offering and publishes it widely, creating a demand for the private offering.

Free Initial Consultation with Lawyer

It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506

Ascent Law LLC

4.9 stars – based on 67 reviews

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What Are The Advantages Of Private Placement?

What Are The Advantages Of Private Placement

The private placement definition is the process of raising capital directly from institutional investors. A company that does not have access to or does not wish to make use of public capital markets can issue stocks, bonds, or other financial instruments directly to institutional investors. Private placement occurs when a company makes an offering of securities to an individual or a small group of investors. Since such an offering does not qualify as a public sale of securities, it does not need to be registered with the Securities and Exchange Commission (SEC) and is exempt from the usual reporting requirements. Private placements are generally considered a cost-effective way for small businesses to raise capital without going public through an initial public offering (IPO). Institutional investors include the following:

• Mutual funds,
• Pension funds
• Insurance companies
• Large banks
You do not have to register private placement issuances with the Securities and Exchange Commission (SEC). In addition, you do not have to provide a detailed prospectus. The issuing company and the purchasing investors negotiates the terms and conditions are negotiated. You cannot trade private placement securities on public markets, but they can be traded privately among institutional investors after they have been issued by the issuing company. A private placement is in contrast to a public offering, which is issued in public capital markets, requires a detailed prospectus, must be registered with the SEC, and can be traded by the investing public in the secondary markets.

Advantages of Private Placement

Many business owners like the idea of raising cash via an initial public offering, but the expense and complexity of going public usually make it impractical for most small businesses. A simpler, less expensive alternative to raise capital and still maintain a high degree of control over the distribution of shares is a private placement. A private placement is similar to an IPO except that rather than being sold to the general public, ownership shares are sold to a small group of private investors, usually large banks, mutual funds, insurance companies, and pension funds. Also known as nonpublic offerings, most private placements do not have to be registered with the Securities and Exchange Commission.

In addition, businesses do not typically need to disclose detailed financial information, and the need for a prospectus is often waived. For these and other reasons, private placements are usually significantly less complicated and expensive than public offerings. Private placements offer small businesses a number of advantages over IPOs. Since private placements do not require the assistance of brokers or underwriters, they are considerably less expensive and time-consuming. In addition, private placements may be the only source of capital available to risky ventures or start-up firms. A private placement may also enable a small business owner to hand-pick investors with compatible goals and interests. Since the investors are likely to be sophisticated business people, it may be possible for the company to structure more complex and confidential transactions. If the investors are themselves entrepreneurs, they may be able to offer valuable assistance to the company’s management. Finally, unlike public stock offerings, private placements enable small businesses to maintain their private status.

The primary advantage of the private placement is that it bypasses the stringent regulatory requirements of a public offering. You have to conduct public offerings in accordance with SEC regulations; however, investors and the issuing company privately negotiate the private placements. Furthermore, they do not have to register with the SEC, do not require the issuing company to publicly disclose its financial statements, and ultimately avoid the scrutiny of the SEC. Another advantage of private placement is the reduced time of issuance and the reduced costs of issuance. Issuing securities publicly can be time-consuming and may require certain expenses. It forgoes the time and costs that come with a public offering. Also, because the investors and the issuing company privately negotiate private placements, they can be tailored to meet the financing needs of the company and the investing needs of the investor. This gives both parties a degree of flexibility. Small businesses face the constant challenge of raising affordable capital to fund business operations. Equity financing comes in a wide range of forms, including venture capital, an initial public offering, business loans, and private placement. Established companies may choose the route of an initial public offering to raise capital through selling shares of company stock. However, this strategy can be complex and costly, and it may not be suitable for smaller, less-established businesses. As an alternative to an initial public offering, businesses that want to offer shares to investors can complete a private placement investment. This strategy allows a company to sell shares of company stock to a select group of investors privately instead of the public. Private placement has advantages over other equity financing methods, including less burdensome regulatory requirements, reduced cost and time, and the ability to remain a private company.

Advantages Of Using Private Placements

There are several advantages to using private placements to raise finance for your business. They:

• allow you to choose your own investors – this increases the chances of having investors with similar objectives to you and means they may be able to provide business advice and assistance, as well as funding
• allow you to remain a private company, rather than having to go public to raise finance
• provide flexibility in the amount and type of funding – eg allowing a combination of bonds and equity capital, with amounts ranging from less than £100,000 to several million pounds
• allow you to make a return on the investment over a longer time period – as private placement investors will be prepared to be more patient than other investors, such as venture capitalists
• require less investment of both money and time than public share flotations
• provide a faster turnaround on raising finance than the venture capital markets or public placements

As a result, private placements are sometimes the only source of raising substantial capital for more risky ventures or new businesses.

Disadvantages Of Using Private Placements

There are also some disadvantages of using private placements to raise business finance. For example, there will be:

• a reduced market for the bonds or shares in your business, which may have a long-term effect on the value of the business as a whole
• a limited number of potential investors, who may not want to invest substantial amounts individually
• the need to place the bonds or shares at a substantial discount to compensate investors for their greater risk and longer-term returns
Additionally, although it isn’t a mandatory requirement, having a credit rating can be an advantage. However, this is time consuming and will be an added cost to the process.

Regulatory Requirements for Private Placement

When a company decides to issue shares of an initial public offering, the U.S. Securities and Exchange Commission requires the company to meet a lengthy list of requirements. Detailed financial reporting is necessary once an initial public offering is issued, and any shareholder must be able to access the company’s financial statements at any time. This information should provide enough disclosure to investors so they can make informed investment decisions. Private placements are offered to a small group of select investors instead of the public. So, companies employing this type of financing do not need to comply with the same reporting and disclosure regulations. Instead, private placement financing deals are exempt from SEC regulations under Regulation D. There is less concern from the SEC regarding participating investors’ level of investment knowledge because more sophisticated investors (such as pension funds, mutual fund companies, and insurance companies) purchase the majority of private placement shares.

Saved Cost and Time

Equity financing deals such as initial public offerings and venture capital often take time to configure and finalize. There are extensive vetting processes in place from the SEC and venture capitalist firms with which companies seeking this type of capital must comply before receiving funds. Completing all the necessary requirements can take up to a year, and the costs associated with doing so can be a burden to the business. The nature of a private placement makes the funding process much less time-consuming and far less costly for the receiving company. Because no securities registration is necessary, fewer legal fees are associated with this strategy compared to other financing options. Additionally, the smaller number of investors in the deal results in less negotiation before the company receives funding.

Private Means Private

The greatest benefit to a private placement is the company’s ability to remain a private company. The exemption under Regulation D allows companies to raise capital while keeping financial records private instead of disclosing information each quarter to the buying public. A business obtaining investment through private placement is also not required to give up a seat on the board of directors or a management position to the group of investors. Instead, control over business operations and financial management remains with the owner, unlike a venture capital deal.

Restrictions Affecting Private Placement

The SEC formerly placed many restrictions on private placement transactions. For example, such offerings could only be made to a limited number of investors, and the company was required to establish strict criteria for each investor to meet. Furthermore, the SEC required private placement of securities to be made only to “sophisticated” investors—those capable of evaluating the merits and understanding the risks associated with the investment. Finally, stock sold through private offerings could not be advertised to the public and could only be resold under certain circumstances. In 1992, however, the SEC eliminated many of these restrictions in order to make it easier for small companies to raise capital through private placements of securities. The rules now allow companies to promote their private placement offerings more broadly and to sell the stock to a greater number of buyers. It is also easier for investors to resell such securities. Although the SEC restrictions on private placements were relaxed, it is nonetheless important for small business owners to understand the various federal and state laws affecting such transactions and to take the appropriate procedural steps. It may be helpful to assemble a team of qualified legal and accounting professionals before attempting to undertake a private placement.

Many of the rules affecting private placements are covered under Section 4(2) of the federal securities law. This section provides an exemption for companies wishing to sell up to $5 million in securities to a small number of accredited investors. Companies conducting an offering under Section 4(2) cannot solicit investors publicly, and the majority of investors are expected to be either insiders (company management) or sophisticated outsiders with a preexisting relationship with the company (professionals, suppliers, customers, etc.). At a minimum, the companies are expected to provide potential investors with recent financial statements, a list of risk factors associated with the investment, and an invitation to inspect their facilities. In most respects, the preparation and disclosure requirements for offerings under Section 4(2) are similar to Regulation D filings. Regulation D—which was adopted in 1982 and has been revised several times since—consists of a set of rules numbered 501 through 508.

Rules 504, 505, and 506 describe three different types of exempt offerings and set forth guidelines covering the amount of stock that can be sold and the number and type of investors that are allowed under each one. Rule 504 covers the Small Corporate Offering Registration, or SCOR. SCOR gives an exemption to private companies that raise no more than $1 million in any 12-month period through the sale of stock. There are no restrictions on the number or types of investors, and the stock may be freely traded. The SCOR process is easy enough for a small business owner to complete with the assistance of a knowledgeable accountant and attorney. It is available in all states except Delaware, Florida, Hawaii, and Nebraska.

Rule 505 enables a small business to sell up to $5 million in stock during a 12-month period to an unlimited number of investors, provided that no more than 35 of them are non-accredited. To be accredited, an investor must have sufficient assets or income to make such an investment. According to the SEC rules, individual investors must have either $1 million in assets (other than their home and car) or $200,000 in net annual personal income, while institutions must hold $5 million in assets. Finally, Rule 506 allows a company to sell unlimited securities to an unlimited number of investors, provided that no more than 35 of them are non-accredited. Under Rule 506, investors must be sophisticated. In both of these options, the securities cannot be freely traded.

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West Jordan, Utah
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What Is A Private Placement Of Stocks?

Private Placement Attorney

There are many different ways to raise money for your small business.

What are Private Stock Offerings and How Can They Help You Finance Your Small Business?

You can get loans from your friends and family, liquidate your savings, ask for donations online, or even throw a local fundraiser. But one the most powerful way to finance your small business is a private stock offering. A private stock offering—sometimes called a private placement—is when you sell securities in your business without an initial public offering—usually called an IPO. In other words, a private placement is when you sell your company’s stocks or bonds to private investors. For example, if you run a start-up shopping site, you might offer private stocks to a private investor. This investor gives you money to fund your burgeoning start-up in hopes that he or she will see a large financial return on their investment. There are numerous ways to find investors that might want to purchase securities in a private stock offering. Bankers, small business attorneys, and your personal business contacts are a good place to start. But it’s important to remember that not everyone qualifies as a private investor. While private offerings are governed by less strict rules than IPOs, the Securities and Exchange Commission (SEC) still has guidelines your business will need to follow. (Do note that you will not need to file anything with the SEC, however. In other words, a private placement allows you to get funding for your business without dealing directly with the SEC.)

Who can invest in a private stock offering?

Private placements must come from what the SEC terms an “accredited investor.” Our article, “What are Accredited Investors and How Can They Help Finance Your Small Business?” lays out a fuller picture, but know for starters that accredited investors are generally wealthy individuals or organizations. For example, for a single person to be classified as an accredited investor, they must have a net worth of $1 million or a yearly income of $200,000. Trusts, banks, investment and insurance companies also qualify.

What documents you should have to hold a private stock offering?

• Operating Agreement: First and foremost, you need to make sure your company is incorporated and that you have an Operating Agreement. Legal status and a plan that shows how your business runs will be crucial in securing the sort of savvy investors your small business will want.

• Private Placement Memorandum: A Private Placement Memorandum outlines the terms and conditions upon which you are offering interests in your business. You can think of it as a brochure for your business, where you alert potential investors to the facts they’ll need to know about your company. You can set the amount of stocks you’re offering overall, the price for each, how many an investor can purchase, when that investor will receive stocks, and pertinent information about your company (such as its founders, age, projected profit, etc.).

• Subscription Agreement: A Subscription Agreement is just that: an agreement. When a private investor decides to purchase securities in your small business, a subscription agreement is the contract you use to put the investment in writing. It should note the price and amount of stocks being purchased, in addition to information about the company itself.

• Accredited Investor Questionnaire Form: An accredited investor questionnaire is used by companies and individuals to validate that they are in fact an accredited investor, as defined by the SEC. Making sure your investors are accredited investors can save you a lot of hassle down the road, when your business is growing even faster. Rocket Lawyer provides this form as part of our Subscription Agreement.

While it might sound like a lot of paperwork, it’s not as bad as it seems. You’re simply showing potential investors how great your company is (via a Private Placement Memorandum) while they prove that they’re legally allowed to invest (via an accredited investor questionnaire form). When you agree, you both sign a contract (the Subscription Agreement) and you receive the funding you need to push your small business to the next level. Private Placement.

What Is a Private Placement?

A private placement is a sale of stock shares or bonds to pre-selected investors and institutions rather than on the open market. It is an alternative to an initial public offering (IPO) for a company seeking to raise capital for expansion. Investors invited to participate in private placement programs include wealthy individual investors, banks and other financial institutions, mutual funds, insurance companies, and pension funds. One advantage of a private placement is its relatively few regulatory requirements.

Understanding Private Placement

There are minimal regulatory requirements and standards for a private placement even though, like an IPO, it involves the sale of securities. The sale does not even have to be registered with the U.S. Securities and Exchange Commission (SEC). The company is not required to provide a prospectus to potential investors and detailed financial information may not be disclosed. The sale of stock on the public exchanges is regulated by the Securities Act of 1933, which was enacted after the market crash of 1929 to ensure that investors receive sufficient disclosure when they purchase securities. Regulation D of that act provides a registration exemption for private placement offerings. The same regulation allows an issuer to sell securities to a pre-selected group of investors that meet specified requirements. Instead of a prospectus, private placements are sold using a private placement memorandum (PPM) and cannot be broadly marketed to the general public. It specifies that only accredited investors may participate. These may include individuals or entities such as venture capital firms that qualify under the SEC’s terms.

Advantages and Disadvantages of Private Placement

Private placements have become a common way for startups to raise financing, particularly those in the internet and financial technology sectors. They allow these companies to grow and develop while avoiding the full glare of public scrutiny that accompanies an IPO. Buyers of private placements demand higher returns than they can get on the open markets.

A Speedier Process

Above all, a young company can remain a private entity, avoiding the many regulations and annual disclosure requirements that follow an IPO. The light regulation of private placements allows the company to avoid the time and expense of registering with the SEC. That means the process of underwriting is faster, and the company gets its funding sooner. If the issuer is selling a bond, it also avoids the time and expense of obtaining a credit rating from a bond agency. A private placement allows the issuer to sell a more complex security to accredited investors who understand the potential risks and rewards.

A More Demanding Buyer

The buyer of a private placement bond issue expects a higher rate of interest than can be earned on a publicly-traded security. Because of the additional risk of not obtaining a credit rating, a private placement buyer may not buy a bond unless it is secured by specific collateral. A private placement stock investor may also demand a higher percentage of ownership in the business or a fixed dividend payment per share of stock.

What is a Stock?

Stock (also capital stock) of a corporation, is all of the shares into which ownership of the corporation is divided. In American English, the shares are collectively known as “stock”. A single share of the stock represents fractional ownership of the corporation in proportion to the total number of shares. This typically entitles the stockholder to that fraction of the company’s earnings, proceeds from liquidation of assets (after discharge of all senior claims such as secured and unsecured debt), or voting power, often dividing these up in proportion to the amount of money each stockholder has invested. Not all stock is necessarily equal, as certain classes of stock may be issued for example without voting rights, with enhanced voting rights, or with a certain priority to receive profits or liquidation proceeds before or after other classes of shareholders. Stock can be bought and sold privately or on stock exchanges, and such transactions are typically heavily regulated by governments to prevent fraud, protect investors, and benefit the larger economy. The stocks are deposited with the depositories in the electronic format also known as Demat account. As new shares are issued by a company, the ownership and rights of existing shareholders are diluted in return for cash to sustain or grow the business. Companies can also buy back stock, which often lets investors recoup the initial investment plus capital gains from subsequent rises in stock price. Stock options, issued by many companies as part of employee compensation, do not represent ownership, but represent the right to buy ownership at a future time at a specified price. This would represent a windfall to the employees if the option is exercised when the market price is higher than the promised price, since if they immediately sold the stock they would keep the difference (minus taxes).

Shares vs. Stocks: What’s the Difference?

The distinction between stocks and shares is pretty blurred in the financial markets. Generally, in American English, both words are used interchangeably to refer to financial equities, specifically, securities that denote ownership in a public company (in the good old days of paper transactions, these were called stock certificates). Nowadays, the difference between the two words has more to do with syntax and is derived from the context in which they are used. Of the two, “stocks” is the more general, generic term. It is often used to describe a slice of ownership of one or more companies. In contrast, in common parlance, “shares” has a more specific meaning: It often refers to the ownership of a particular company.
What’s The Difference Between Shares and Stocks?


Let’s confine ourselves to equities and the equity markets. Investment professionals often use the word stocks as synonymous with companies—publicly-traded companies, of course. They might refer to energy stocks, value stocks, large- or small-cap stocks, food-sector stocks, blue-chip stocks, and so on. In each case, these categories don’t refer so much to the stocks themselves as to the corporations that issued them. Financial pros also refer to common stock and preferred stock, but, actually, these aren’t types of stock but types of shares.


A share is the single smallest denomination of a company’s stock. So if you’re divvying up stock and referring to specific characteristics, the proper word to use is shares. Technically speaking, shares represent units of stock. Common and preferred refer to different classes of stock. They carry different rights and privileges, and trade at different prices. Common shareholders are allowed to vote on company referenda and personnel, for example. Preferred shareholders do not possess voting rights, but on the other hand, they have priority in getting repaid if the company goes bankrupt. Both types of shares pay dividends, but those in the preferred class are guaranteed. Common and preferred are the two main forms of stock shares; however, it’s also possible for companies to customize different classes of stock to fit the needs of their investors. The different classes of shares, often designated simply as “A,” “B,” and so on, are given different voting rights. For example, one class of shares would be held by a select group who are given perhaps five votes per share, while a second class would be issued to the majority of investors who are given just one vote per share.

Special Considerations

The interchangeability of the terms stocks and shares applies mainly to American English. The two words still carry considerable distinctions in other languages. In India, for example, as per that country’s Companies Act of 2013, a share is the smallest unit into which the company’s capital is divided, representing the ownership of the shareholders in the company, and can be only partially paid up. A stock, on the other hand, is a collection of shares of a member, converted into a single fund, that is fully paid up.

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It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!

Michael R. Anderson, JD

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506

Ascent Law LLC

4.9 stars – based on 67 reviews

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