Loading the player...

What is a 'Private Placement'

A private placement is a capital raising event that involves the sale of securities to a relatively small number of select investors. Investors involved in private placements can include large banks, mutual funds, insurance companies and pension funds. 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.

BREAKING DOWN 'Private Placement'

A private placement has minimal regulatory requirements and standards that it must abide by. While it is a capital raising event involving the sale of securities, it is a method of capital raising that does not have to be registered with the Securities and Exchange Commission (SEC). Its investors include a small pool of entities and individuals. The investment does not require a prospectus and in many cases, detailed financial information is not disclosed.

How Securities Are Regulated

The SEC regulates how securities are sold to the public through the Securities Act of 1933. This law was put into place after the stock market crash of 1929 to ensure that investors receive sufficient disclosure when they purchase securities. If a company wants to issue stocks or bonds to the public, it must register with the SEC and sell the security using a prospectus.

Regulation D of the 1933 Act provides a registration exemption for private placement offerings. Regulation D allows an issuer to sell securities to a targeted group of accredited investors that meet specified requirements. Instead of a prospectus, private placements are sold using a private placement memorandum (PPM) and cannot be broadly marketed to the general public.

Accredited Investors

An important aspect of raising capital in a private placement is the involvement of accredited investors. While private placements do not require the issuer to register its securities with the SEC, it does require that the issuer only sell the private securities to investors that qualify as accredited investors under the standards set forth by the SEC in Regulation D of the Securities Act of 1933.

Accredited investors can be either individuals or entities that qualify under the SEC’s terms. Entities often include venture capital firms. For detailed standards and requirements defining an accredited investor, see also accredited investor.

Private Placement Investments

Private placements can be used for a range of purposes. A company may utilize a private placement to raise capital for its business. Private placements are also common in newly emerging financial technology product offerings. Below are two examples:

1.  Lightspeed POS raised $166 million in a private placement Series D financing round. The funds will be used for business development.

2. Fundrise offers online investing in real estate through private placement offerings. Its wealth management services include offerings specifically for accredited investors and capital is generated through private placement.

Private Placement Advantages

The private placement regulations allow an issuer to avoid the time and expense of registering with the SEC. The process of underwriting the security is faster, which allows the issuer to receive proceeds from the sale in less time. If an issuer is selling a bond, it can also avoid the time and expense to get a credit rating from a bond agency. A private placement issuer can sell a more complex security to accredited investors who understand the potential risks and rewards, and the firm can remain a privately owned company, which avoids the need to file annual disclosures with the SEC.

Private Placement Disadvantages

The buyer of a private placement bond issue expects a higher rate of interest than he earns on a publicly traded security. Because of the additional risk of not obtaining a credit rating, a private placement buyer may not buy a bond unless the bond is secured by specific collateral. A private placement stock investor may demand a higher percentage of ownership in the business or a fixed dividend payment per share of stock.

RELATED TERMS
  1. Placement

    A placement is the sale of securities to a small number of private ...
  2. Placement Agent

    A placement agent is an intermediary who raises capital for investment ...
  3. SEC Form D

    SEC Form D is a filing with the Securities and Exchange Commission ...
  4. Accredited Investor

    Accredited investor has the financial sophistication and capacity ...
  5. Series 82

    The Series 82 is a certification giving financial professionals ...
  6. Privately Owned

    Privately owned refers to businesses that have not offered public ...
Related Articles
  1. Managing Wealth

    How to invest in private companies

    It can be tough to analyze a company that doesn't trade publicly, but there are several advantages to investing in private companies.
  2. Managing Wealth

    How to become an accredited investor

    Accredited investors have more opportunities that non-accredited investors but, surprisingly, there is no set process for becoming one.
  3. Investing

    Gold Standard Stock Falls After Issuing Shares (GSV)

    Gold Standard said it will use proceeds from the private placement to make various investments.
  4. Small Business

    Why Companies Stay Private

    Many private companies prefer to stay private and find alternate sources of capital. Find out what firms have to gain by eschewing the windfall from a flashy IPO.
  5. Managing Wealth

    How to start your own private equity fund

    Use this how-to guide to launch your own private equity firm.
  6. Investing

    How to Invest in Private Equity

    Private equity might be a pricey investment, but the payoff could be big. Here's why and where you should invest in private equity.
  7. Investing

    Methods used in valuing private companies

    There are a few methods for calculating the valuation of a private company. By using financial information from peer groups, we can estimate the valuation of a target firm.
  8. Investing

    Using Public SEC Filings To Analyze Companies

    Reports from the Securities and Exchange Commission provide investors with an edge in determining the investment value of companies. Learn what to look for in these financial reports.
  9. Insights

    Understand the SEC Rules on Equity Crowdfunding

    The SEC's adoption of equity crowdfunding rules, initiated under the JOBS Act, enables small investors to invest in companies that show early potential.
  10. Investing

    Private vs Public Equity: What's Best?

    What is the better way for a company to attract investors; by making its stock available for sale to whoever wants some, or by petitioning rich people?
RELATED FAQS
  1. How does private placement affect share price?

    Understand what it means when a company does a private placement, and find out how this typically impacts the share price ... Read Answer >>
  2. How do I determine where to set my stop loss?

    Read about some theories on stop-loss placement and how traders use stop-loss orders to hedge against losses and capture ... Read Answer >>
  3. How can I sell private company stock?

    In some instances, both private and public companies may issue shares to their own employees as part of a compensation program. ... Read Answer >>
Hot Definitions
  1. Futures Contract

    An agreement to buy or sell the underlying commodity or asset at a specific price at a future date.
  2. Yield Curve

    A yield curve is a line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, bonds and cash equivalents, also their mutual, exchange-traded ...
  4. Gross Profit

    Gross profit is the profit a company makes after deducting the costs of making and selling its products, or the costs of ...
  5. Diversification

    Diversification is the strategy of investing in a variety of securities in order to lower the risk involved with putting ...
  6. Intrinsic Value

    Intrinsic value is the perceived or calculated value of a company, including tangible and intangible factors, and may differ ...
Trading Center