An Overview of Private Placements

Posted by: Hilger Hammond On: 19th October 2011 | no responses.

By: Mark Rysberg

Many business owners and venture capitalists rely on private placements to raise capital. In simplest terms, a private placement is a non-public offering of securities such as stock, partnership interests, or membership interests. These offerings are subject to the Securities Act of 1933 (“Act”), but do not require registration with the Securities and Exchange Commission (“SEC”) if certain exemptions are satisfied.

A private placement may be exempt from registration with the SEC if the conditions under Regulation D of the Act are followed. Whether a private placement qualifies for Regulation D exemption is generally determined by the monetary value of the offering and whether the investors are accredited or non-accredited. Investor accreditation is determined on an investor by investor basis by considering each investors net worth and investing sophistication. The specific criteria for investor accreditation are identified in Rules 501-503 of the Act. (Here).

The first limitation for exemption under Rules 504-506 of Regulation D is the value of the offering. Rule 504 applies to offerings valued at less than $1,000,000, Rule 505 applies to offerings less than $5,000,000, and no limit exists for Rule 506 offerings. The second limitation is whether an investor is accredited. Under Rule 504, an unlimited number of accredited and non-accredited investors may participate. Rules 505-506 limit the number of non-accredited investors to 35, but allow an unlimited number of accredited investors.

Private placements can be a valuable tool for raising capital for investments or existing businesses, but need to be tailored to each venture. This article is intended to provide a background of private placements. How private placements can act as a valuable tool for business owners will be discussed in Part II of this Article.