A private placement generally refers to a company’s private (non-public) placement (offer and sale) of securities to a relatively small number of investors with whom the company has a preexisting, substantive relationship in order to raise capital to fund or grow its business. Investors in private placements typically include friends and family, accredited investors, and institutional investors.
In the United States, Section 4(a)(2) of the Securities Act of 1933 (the “Act”) exempts securities transactions by an issuer not involving any public offering from the registration requirements of the Act. This is the statutory provision under which private placements are regulated.
Rule 506(b) of Regulation D is a non-exclusive “safe harbor” for compliance with Section 4(a)(2). In short, this means that compliance with its provisions provides a company with the assurance that its offering satisfies the requirements for Section 4(a)(2). It is not, however, the sole means by which a company can comply with Section 4(a)(2).
There is no limit to the amount of capital a company conducting an offering under Rule 506(b) can raise and no limit to the number of accredited investors that can invest in the offering either. Rule 506(b) offerings, however, must comply with the following:
- no broad-based public communications (general solicitation or advertising) are allowed to market the securities; and
- securities may not be sold to more than 35 sophisticated, non-accredited investors.
If a company sells to non-accredited investors, it:
- must provide them with robust business and financial disclosure; and
- answer any questions any prospective purchasers may have.
Securities sold in private placements are “restricted securities,” which generally means that they are subject to holding periods before sales are permitted.
A company that conducts a private placement pursuant to Rule 506(b) is required to file a notice with the SEC on a Form D within 15 days after the first sale of securities in the offering. State securities laws also apply, although not with respect to state registration and qualification requirements.