Definitions

private-placement

Private placement

In the United States, a private placement is an offering of securities that are not registered with the Securities and Exchange Commission (SEC). Such offerings exploit an exemption offered by the Securities Act of 1933 that comes with several restrictions, including a prohibition against general solicitation. This exemption allows companies to avoid quarterly reporting requirements and many of the legal liabilities associated with the Sarbanes-Oxley Act. The SEC passed Regulation D (Reg D) in 1982 with clarifies how companies can be sure they are exempt from registration under the Securities Act. Regulation D does include a notification requirement in Rule 503.

Private placements offer "units", where a "unit" is (again, typically) comprised of 1 common share and one-half or one warrant. The warrant is usually good for buying 1 common share at a specified price and has a validity period. An example would be a unit that includes one-half a warrant, where one whole warrant is good for purchasing 1 common share at 56 cents in the 24 months following the private placement closing.

Another key is the hold period, Canadian regulation for example prohibits trading securities purchased through private placement for a four-month period following the closing.

What is a Regulation D Offering?

Regulation D Offerings

A private placement memorandum, also known as an offering memorandum or "PPM", is a document that outlines the terms of securities to be offered in a private placement. The structure of the private placement memorandum somewhat resembles a business plan in both layout and detail. A PPM allows your company the ability to raise capital though the sale of equity or debt securities.

Under the Securities Act of 1933, any offer to sell securities must either be registered with the SEC or meet an exemption. Regulation D (or Reg D) contains three rules providing exemptions from the registration requirements, allowing some smaller companies to offer and sell their securities without having to register the securities with the SEC. For more information about these exemptions, read our publications on Rules 504, 505, and 506 of Regulation D.

While companies using a Reg D exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what’s known as a "Form D" after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s executive officers and stock promoters, but contains little other information about the company.

If you are thinking about investing in a Reg D company, you should access EDGAR Company Search to determine whether the company has filed Form D. If the company has filed a Form D, you can request a copy. If the company has not filed a Form D, this should alert you that the company might not be in compliance with the federal securities laws

You should always check with your state securities regulator to see if they have more information about the company and the people behind it. Be sure to ask whether your state regulator has cleared the offering for sale in your state. You can get the address and telephone number for your state securities regulator by calling the North American Securities Administrators Association at (202) 737-0900 or by visiting its website. You’ll also find this information in the state government section of your local phone book.

The private placement memorandum can be as important for the entrepreneur as the business plan itself. The PPM is a formal description of an investment opportunity that is structured to comply with various federal securities regulations. A properly structured private placement memorandum is designed to provide specific company information to prospective investors in order to protect sellers from liabilities related to selling unregistered securities.

Private Placement Memorandum Regulation D contain the following features: a complete description of the security offered for sale, the terms of the sales, as well as the capital structure and historical financial statements. Additionally, a description of the business is also needed, which includes parts of the business plan and a summary biography of the management team. The company’s risk factors associated with the investment also need to be highlighted.

Rule 504 of Regulation D

Rule 504 of Regulation D

Rule 504 of Regulation D provides an exemption from the registration requirements of the federal securities laws for some companies when they offer and sell up to $1,000,000 of their securities in any 12-month period.

A company can use this exemption so long as it is not a blank check company and does not have to file reports under the Securities Exchange Act of 1934. Also, the exemption generally does not allow companies to solicit or advertise their securities to the public, and purchasers receive "restricted" securities, meaning that they may not sell the securities without registration or an applicable exemption.

Rule 504 does allow companies to sell securities that are not restricted, if one of the following circumstances is met:

The company registers the offering exclusively in one or more states that require a publicly filed registration statement and delivery of a substantive disclosure document to investors;

A company registers and sells the offering in a state that requires registration and disclosure delivery and also sells in a state without those requirements, so long as the company delivers the disclosure documents required by the state where the company registered the offering to all purchasers (including those in the state that has no such requirements); or

The company sells exclusively according to state law exemptions that permit general solicitation and advertising, so long as the company sells only to "accredited investors." Even if a company makes a private sale where there are no specific disclosure delivery requirements, a company should take care to provide sufficient information to investors to avoid violating the antifraud provisions of the securities laws. This means that any information a company provides to investors must be free from false or misleading statements. Similarly, a company should not exclude any information if the omission makes what is provided to investors false or misleading.

While companies using the Rule 504 exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what is known as a "Form D" after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s owners and stock promoters, but contains little other information about the company.

Rule 505 of Regulation D

Rule 505 of Regulation D

Rule 505 of Regulation D allows some companies offering their securities to have those securities exempted from the registration requirements of the federal securities laws. To qualify for this exemption, a company:

Can only offer and sell up to $5 million of its securities in any 12-month period;

May sell to an unlimited number of "accredited investors" and up to 35 other persons who do not need to satisfy the sophistication or wealth standards associated with other exemptions;

Must inform purchasers that they receive "restricted" securities, meaning that the securities cannot be sold for at least a year without registering them; and

Cannot use general solicitation or advertising to sell the securities.

Rule 505 allows companies to decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that generally are the same as those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well. The company must also be available to answer questions by prospective purchasers.

Here are some specifics about the financial statement requirements applicable to this type of offering:

Financial statements need to be certified by an independent public accountant;

If a company other than a limited partnership cannot obtain audited financial statements without unreasonable effort or expense, only the company's balance sheet (to be dated within 120 days of the start of the offering) must be audited; and

Limited partnerships unable to obtain required financial statements without unreasonable effort or expense may furnish audited financial statements prepared under the federal income tax laws.

While companies using the Rule 505 exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what is known as a "Form D" after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s owners and stock promoters, but contains little other information about the company.

Rule 506 of Regulation D

Rule 506 of Regulation D

Rule 506 of Regulation D is considered a "safe harbor" for the private offering exemption of Section 4(2) of the Securities Act. Companies using the Rule 506 exemption can raise an unlimited amount of money. A company can be assured it is within the Section 4(2) exemption by satisfying the following standards:

The company cannot use general solicitation or advertising to market the securities;

The company may sell its securities to an unlimited number of "accredited investors" and up to 35 other purchases. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated—that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;

Companies must decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well;

The company must be available to answer questions by prospective purchasers;

Financial statement requirements are the same as for Rule 505; and

Purchasers receive "restricted" securities, meaning that the securities cannot be sold for at least a year without registering them.

While companies using the Rule 506 exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what is known as a "Form D" after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s owners and stock promoters, but contains little other information about the company.

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Private placements

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