Private Purchase

What Is a Private Purchase?

Private purchase refers to an investment in which an individual or institutional investor purchases shares in a privately-held firm. The investor may buy all of the company's shares, or just a portion of them. The fact that a private purchase does not involve the use of capital markets means that a broker is usually required to complete the deal.

Understanding Private Purchase

Venture capital (VC) firms seeking to adjust their holdings in a particular company will often make private purchases. These positions are usually long holdings. Add that to the fact that private markets are not as liquid, and offer less investment information than public exchanges, private investors and VC firms are often able to use this to their advantage.

The limited nature of private shares means they're not as easy to purchase as public stocks. But there are a few different ways a private stock can be acquired. Since a private company has not yet made an initial public offering, its shares are typically closely held by the firm's founders and perhaps some VC and private equity investors.

Key Takeaways

  • Private purchase refers to investments in which an individual or institutional investor purchases shares in a privately-held firm.
  • The vast majority of private purchases are restricted to accredited investors.
  • The SEC regulates private purchases depending on the amount raised and disclosures made.

But individual investors with high-net-worth, called accredited investors by the Securities and Exchange Commission (SEC), are allowed to make private purchases with venture funds, private placements, and other exclusive opportunities. Being an accredited investor means that the investors have demonstrated the personal wealth and professional experience to show that they understand the risks of such investments.

The SEC regulates private purchases by categorizing them based on the amount raised and disclosures required during an offering. For example, startups making regulation A offerings can raise up to $50 million from private investors in a calendar year. They must register with the SEC for such offerings but the disclosures required of them are not as strict as those for publicly-held companies. Regulation D offerings limit the amount raised to $5 million in a single year and only 35 unaccredited investors can participate in the offering.

But even non-accredited investors can sometimes purchase private shares. Specific companies are allowed to sell a small number of them to outside investors, and SEC rules also state that some restricted private shares can be resold publicly after a six-month or one-year holding period.

Crowdfunding offers another chance for private purchase opportunities. SEC recently relaxed its rules around crowdfunding, permitting private companies to raise $1,070,000 in a 12-month period through smaller investors. But the commission also has rules outlining how much those individuals are allowed to invest: It places strict limitations on the percentage of income or net worth a crowd-funder can invest in a private company in a given year.

An Example of How Private Purchase Works

More often than not, a private purchase is a tool used by wealthy company executives to increase or adjust their holdings in their firms. For example, in 2017, Jupai Holdings Limited, a wealth management service provider focused on the Chinese market, announced that its chair and CEO would purchase nearly 20 million Jupai shares. This purchase from one of the company's directors in a private transaction amounted to about 10 percent of the outstanding stock.

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  1. Securities & Exchange Commission. "Frequently Asked Questions About Exempt Offerings."

  2. U.S. Securities And Exchange Commission. "Updated Investor Bulletin: Regulation A."

  3. U.S. Securities And Exchange Commission. "Investor Bulletin: Private Placements Under Regulation D."

  4. U.S. Securities and Exchange Commission. "Regulation Crowdfunding: A Small Entity Compliance Guide for Issuers."

  5. Jupai Holdings Limited. "Jupai Announces Private Share Purchase by CEO."

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