Private Placement
A private placement is a non-public offering of securities conducted in reliance on an available exemption from registration under the Securities Act of 1933.
Private does not mean unregulated
A private placement is often called an unregistered offering, but that phrase can be misunderstood.
The securities are not being sold through a Securities Act registration statement for that offering. The issuer must instead fit within a valid exemption from registration.[1]
Federal antifraud rules still apply. Broker-dealers can also have FINRA obligations when they recommend or sell private placements.[2]
Common private-placement securities
Private offerings can involve:
- common stock
- preferred stock
- convertible notes
- bonds
- limited partnership interests
- LLC interests
- warrants
- fund interests
The legal structure of the security and the registration exemption are separate questions.
Regulation D is common, not universal
FINRA notes that many private placements use Regulation D safe harbors, including Rules 504, 506(b) and 506(c).[1]
Other exempt-offering pathways also exist.
That means “private placement” is the broader category. Regulation D is one major framework within it.
Disclosure can differ sharply
A registered public company filing a securities offering may provide a prospectus and extensive SEC-filed disclosures.
A private issuer can have different disclosure obligations depending on the exemption and investor mix. That can leave investors with less standardized information and a greater need to investigate:
- management background
- capitalization
- related-party transactions
- use of proceeds
- financial statements
- valuation assumptions
- contractual rights
- transfer restrictions
FINRA specifically emphasizes reasonable investigation by broker-dealers involved in recommended private placements.[2]
Liquidity can be limited
Private-placement securities are often restricted securities or otherwise difficult to resell.
There may be no national exchange, no continuous market maker and no readily observable market price. Even when a legal resale path eventually exists, finding a buyer can be difficult.
That makes liquidity risk central rather than incidental.
Worked comparison
Consider two investments in similar companies:
Public share: trades daily on an exchange with current market quotes.
Private share: sold under an exemption, subject to transfer restrictions and no established public market.
The business risk could be similar, but the investor's ability to verify price and exit can be dramatically different.
Common mistakes
“Private placement means the SEC approved the deal privately.”
No. Reliance on a registration exemption is not SEC approval.
“Accredited investors do not need disclosure.”
No. Investor sophistication does not eliminate antifraud protections or the need for diligence.
“Unregistered means illegal.”
No. Federal securities law provides numerous lawful registration exemptions.
“Private securities can always be sold after a short holding period.”
No. Legal eligibility to resell and practical liquidity are different issues.
Example
A private company may sell preferred shares to accredited investors under Rule 506(c) rather than registering a public stock offering with the SEC.
Professional note
For a private placement, begin with the exact exemption, security terms, cap table, transfer restrictions and use of proceeds. If those basics are unclear, a headline return projection is not useful enough to compensate for the information gap.
Related terms
- Preferred Stock
Preferred stock is an equity security that generally ranks ahead of common stock for dividends and liquidation proceeds, subject to its specific terms.
- Warrant
A warrant is a security or contractual right that generally allows the holder to buy issuer shares at a specified exercise price before expiration.
- Convertible Securities
Convertible securities are commonly bonds, notes or preferred shares that can convert into common stock or another security under specified terms.
- Registration Statement
A registration statement is a filing with the SEC that provides required disclosures when a security or securities offering is registered under federal securities laws.
- Selling Shareholder
A selling shareholder is an existing owner of securities that sells some or all of those securities to other investors through an offering or registered resale.
- Direct Listing
A direct listing is a method for a company to list securities on a public exchange without conducting a traditional underwritten initial public offering.
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