Placement: Definition and Example in Finance, Regulations & Risks

What Is a Placement?

A placement is the sale of securities to a small number of private investors that is exempt from registration with the Securities and Exchange Commission under Regulation D, as are fixed annuities. This exemption makes a placement a less expensive way for a company to raise capital compared with a public offering. A formal prospectus is not necessary for a private placement, and the participants in a private placement are usually large, sophisticated investors such as investment banks, investment funds, and insurance companies.

Understanding Placement

A placement can also be called a private placement or unregistered offering. These securities offerings are exempt from being registered by the SEC because they are not offered to the general public. They are instead offered to a small group of investors, usually knowledgeable individual investors with deep pockets, and institutions such as investment funds and banks.

Regulation D

While private placements are not subject to the same laws and regulations of public offerings, they have to comply with Regulation D, a set of SEC rules that apply to securities sold in unregistered offerings. The three SEC rules that placements have to follow are Rules 504, 505, and 506. Rule 504 states that certain issuers can offer and sell up to $1 million of securities in any 12-month period, and these securities can be offered to any type of investor. This stock may be freely traded.

Under Rule 505, businesses are permitted 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. Non-accredited investors must be given certain information, including financial statements. If sales are made only to accredited investors, the issuer has discretion over what information to disclose to the investors. However, if both accredited and non-accredited investors participate in the offering, any information provided to accredited investors must be provided to non-accredited investors as well.

Rule 506 states that a company can sell unlimited securities to an unlimited number of investors, provided that no more than 35 of them are non-accredited, as long as the non-accredited investors that participate in the offering are "sophisticated investors." This means they must have the knowledge and experience to evaluate the investment. Securities sold under Rules 505 and 506 cannot be freely traded.

Cautions

While many placements offer valuable opportunities to those investors who have the opportunity to partake, there are reasons to be cautious. SEC rules are meant to protect investors and ensure the proper disclosure of information to the public. Private placements do not follow these rules and can carry higher risks. This is why financially knowledgeable, high net-worth individuals and investment banks typically participate in these opportunities. However, investors can often earn some good returns through placements. In October 2020, FVCBankcorp, Inc. completed a private placement of $20 million of its fixed­-to­-floating rate subordinated notes that carry a 4.875% fixed interest rate for the first five years.