Private placement Guide


Fundz' Private Placement Guide  

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1.) What is a Private Placement?

As stated by Investopedia, a private placement is a capital raising event that involves the sale of securities to a relatively small number of select investors.

While investors involved in private placements can include large banks, mutual funds, insurance companies and pension funds, they also include Angel Investors, Venture Capitalists and other high net-worth individuals. Most private placements are offered under the Rules known as Regulation D.

 A private placement is different from a public issue in which securities are made available for sale on the open market to any type of investor.

2.) Examples of Private Placements

Here are some real world examples of Private Placements:

1)  You hear about that startup that just raised $200,000 for a stake in their company. Chances are, that was a private placement to one or more high net-worth investors, known as Angel Investors.

2)  You read about a high-tech company raising $10 million in what you hear is a “Series B” investment. That is also a private placement, probably to more than one venture capital funds.

3) A Hedge Fund is raising $10,000,000 for investment purposes from a couple institutions. Within 15 days of the sale, they file a Form D with the SEC as this is a third type of private placement. 

Q: So how big is this “Private Placement”/unregistered offering market vs. traditional offerings of registered securities, such as IPOs? Read on:

3.)Six Fascinating Facts About the Private Placement Market:

  1. According to The Securities and Exchange Commission (SEC), Division of Economic Risk Analysis (DERA), from 2010 through 2016 $20.2 trillion was raised in total capital with $8.8 trillion through registered securities and the majority, $11.38 trillion from exempt offerings, i.e. private placements.
  2. The private placement market has grown considerably in recent years. It was $1.87 trillion in 2015 and $1.68 trillion in 2016. In 2014, there were 33,429 Regulation D offerings reported on Form D filings, accounting for about $1.3 trillion raised.
  3. Issuers in non-financial industries reported raising $133 billion during 2014. (Think actual companies money raising money vs. investment funds raising money) 
  4. Capital raised through Regulation D offerings continues to be positively correlated with public market performance, suggesting that capital formation in the unregistered market is pro-cyclical, i.e., the strength of the unregistered market is closely tied to the health of the public market. 
  5. Consistent with the original intent of Regulation D to target the capital formation needs of small business, the median offer size of non-financial issuers is less than $2 million.
  6. Aggregated Form D information indicates that, on average, more than 260,000 investors participated in Regulation D offerings for the period 2009-2016 but the SEC believes the number of unique investors is lower than 260,000.

Ok, so most capital raises in the U.S. for either debt or equity stakes in a company are done through private placements. So, what are the rules and regulations concerning private placements?

4.) Rules and Regulations of Private Placements

To qualify as a private placement, an offering by an issuer must meet either the requirement of Sections 3(b) or 4(2) of the 1933 Act as developed through SEC interpretation and court decisions or must follow the conditions set out under Regulation D of the 1933 Act. Persons claiming the exemption from the 1933 Act carry the burden of proving that its activities came within that exemption.

5.)What is Regulation D?

Regulation D is a series of six rules, Rules 501-506, establishing three transactional exemptions from the registration requirements of the 1933 Act. In other words, if a company meets the requirements, they are exempt from having to register the securities they are looking to sell.

6.) What is SEC Form D?

SEC Form D is a document filed with the SEC that most firms issuing private placements are required to file within 15 days from the first sale of securities.

Form D filings, are due within fifteen days after the first sale of securities in an offering under Regulation D. Form D filings are created by an issuer’s attorney.

7.) What are “Accredited Investors”?

Outside of large institutions and funds, one group that participates in private placements are referred to as “accredited investors”. Especially, when a startup is looking for its first funding, they will often approach this group. So who are accredited investors?

Accredited Investor” is defined in Rule 501(a). The principal categories of accredited investors are as follows:

1) Directors, executive officers, and general partners of the issuer, including general partners of general partners in two-tier syndicating. (The term “executive officers” is more fully defined in the Regulation.)

(2) Purchasers whose net worth either individually or jointly with their spouse equals or exceeds $1 million. It is important to note that while there is no definition of “net worth” in Regulation D, the value of the purchaser’s home is excluded in Section 501(a)(5)(i)(A)

(3) Natural person purchasers who have “income” in excess of $200,000 in each of the two most recent years and who reasonably expect an income in excess of $200,000 in current year (or $300,000, jointly with their spouse).

(4) A business entity will be treated as a single accredited investor unless it was organized for the specific purpose of acquiring the securities offered, in which case each beneficial owner of the security is counted separately.

8.) Private Placement Offering Memorandum

To meet the requirement of Regulation D or the requirements of Section 4(2) of the 1933 Act (the private placement exemption), the issuer is almost always required to make extensive disclosures regarding the nature, character and risk factors relating to an offering. The disclosure document often is labeled “Offering Memorandum”. Offering Memorandums are created by an issuer’s attorney.


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