The sale of securities to a relatively small number of select investors as a way of raising capital. Investors involved in private placements are usually large banks, mutual funds, insurance companies and pension funds. Private placement is the opposite of a public issue, in which securities are made available for sale on the open market.
Since a private placement is offered to a few, select individuals, the placement does not have to be registered with the Securities and Exchange Commission. In many cases, detailed financial information is not disclosed and a the need for a prospectus is waived. Finally, since the placements are private rather than public, the average investor is only made aware of the placement after it has occurred.
The securities offered do not have to be registered with the Securities and Exchange Commission if the issuance of the securities conforms to an exemption from registrations as set forth in the Securities Act of 1933 and SEC rules promulgated thereunder. Most private placements are offered under the Rules known as Regulation D. Different rules under Regulation D provide stipulations for offering a Private Placement, such as required financial criteria for investors or solicitation allowances. Private placements may typically consist of offers of common stock or preferred stock or other forms of membership interests, warrants or promissory notes (including convertible promissory notes), bonds, and purchasers are often institutional investors such as banks, insurance companies or pension funds. Common exemptions from the Securities Act of 1933 allow an unlimited number of accredited investors to purchase securities in an offering. Generally, accredited investors are those with a net worth in excess of $1 million or annual income exceeding $200,000 or $300,000 combined with a spouse. Under these exemptions, no more than 35 non-accredited investors may participate in a private placement. In most cases, all investors must have sufficient financial knowledge and experience to be capable of evaluating the risks and merits of investing in a company.