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Brushing Up on Private Placements

August 3, 2016

Brushing Up on Private Placements

August 3, 2016 | by Beth Glavosek | Blue Vault

File photo of the U.S. Securities and Exchange Commission logo hangs on a wall at the SEC headquarters in WashingtonAlthough private investments into companies have existed for hundreds of years, the Securities Act of 1933 set the rules for modern-day private placements. Depending on net worth and risk tolerance, private placements can be a good choice for investors seeking capital growth and tax advantages.

According to the Securities & Exchange Commission (SEC), private placements are securities offerings exempt from registration with the SEC. Generally speaking, private placements are not subject to the laws and regulations that are designed to protect investors, such as the comprehensive disclosure requirements that apply to registered offerings. Private placements are intended to raise funds from investors with a relatively high net worth.

You will often hear of private placements, especially in the broker/dealer world, referred to as Reg D offerings. 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 companies to offer and sell their securities without having to register the securities with the SEC.

Reg D offerings may be sold to an unlimited number of accredited investors. An individual will be considered an accredited investor if he or she:

  • - Has earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year,  OR
  • - Has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence and any loans secured by the residence (up to the value of the residence).

Non-accredited investors may also participate in the offering if they are financially sophisticated and have sufficient knowledge and experience in financial and business matters to evaluate the investment.

Reg A and Reg A+ are other types of private placements that allow smaller companies to raise capital from qualified individual investors. They provide exemption from registration for smaller issuers of securities.

Not surprisingly, FINRA and the SEC caution investors to tread carefully into private placement territory. However, certain investors wanting to take advantage of tax benefits may consider such offerings. Product sponsor Inland offers an overview of why private placements can make sense for certain investors.

Are private placements making a comeback? We’ll look into them further in future blog posts.


August Blog Series on Private Placements

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