What

As the name suggests, a private placement is a private alternative to issuing, or selling, a publicly offered security as a means for raising capital. In a private placement, both the offering and sale of debt or equity securities is made between a business, or issuer, and a select number of investors. There may be as few as one investor for any issue.

The three most important features that would classify a securities issue as a private placement are:
• The securities are not publicly offered
• The securities are not required to be registered with the SEC
• The investors are limited in number and must be accredited
Companies, both public and private, issue in the private placement market for a variety of reasons, including a desire to access long-term, fixed-rate capital, diversify financing sources, add additional financing capacity beyond existing investors (banks, private equity, etc.) or, in the case of privately held businesses, to maintain confidentiality. Since private placements are offered only to a limited pool of accredited investors, they are exempt from registering with the Securities and Exchange Commission (SEC).

This affords the issuer the opportunity to avoid certain costs associated with a public offering as well as allows for more flexibility regarding structure and terms. One of the key advantages of a private placement is its flexibility. The most common type of private placement is long-term, fixed-rate senior debt, but there is an endless array of structuring alternatives. One of the key advantages of a private placement is its flexibility. Private placement debt securities are similar to bonds or bank loans and can either be secured, meaning they are backed by collateral, or unsecured, where collateral is not required.

In addition to senior debt, other types of private placement debt issuance include:
• Subordinated Debt
• Term Loans
• Revolving Loans
• Asset Backed Loans
• Leases
• Shelf Issues
Traditionally, middle-market companies have issued debt in the private placement market through two primary channels:
• Directly with a private placement investor, such as a large insurance company or other institutional investor
• Through an agent (most often an investment bank) on a best efforts basis who solicits bids from several potential investors – this is typically for larger transactions: $100MM+

A private placement issuance is a way for institutional investors to lend to companies in a similar fashion as banks, with a buy-and-hold approach, and with no required trading or public disclosures. Historically, insurance companies refer to investments as purchasing notes, while banks make loans.

Types of Capital Available to Businesses

When businesses are started, they are often funded by the owners or a family loan. However, as they grow, many companies are unable to finance all needs solely from internal cash flows. When capital needs exceed cash-on-hand, businesses can utilize the following types of capital:

Private Placement Advantages

Private placements present the following advantages:

Long Term

Private placements provide longer maturities than typical bank financing, at a fixed-interest rate. This is ideal for when a business is presented with a growth opportunity where they wouldn’t see the return on their investment right away; a business would have more time to pay back the private placement while having certainty of financing cost over the life of that investment. Also, private placements are typically buy-and-hold, so the company would benefit from having a long-term relationship with the same investor throughout the life of the financing.

Speed in Execution

The growth and maturity of the private placement market has led to improved standardization of documentation, visibility of pricing and terms, increased capacity for financings as well as overall increase of size and depth of the market ($10MM – $1B+). Thus, the private placement market fosters an environment that allows for quick execution of an investment, generally within 6-8 weeks (for the first transaction. Follow-on financings can be executed within a shorter time frame). Additionally, it is typically faster to issue a private placement versus a corporate bond in the public market because the issuer is not required to expend time and resources creating a prospectus and registering with the SEC. Private Placements can complement existing bank debt versus compete with it.

Complement to Existing Financing

Private placements also help diversify a company’s sources of capital and capital structure. Since the terms can be customized, private placements can complement existing bank debt versus compete with it, and can allow a company to better manage its debt obligations. Diversification of funding sources is particularly important during market cycles when bank liquidity may be tight. Private placements enable privately-held, middle-market companies and public companies to access capital just as they would with an underwritten public debt offering, but without certain requirements, such as ratings, registrations, or minimum size. And for public companies, private placements can offer superior execution relative to the public bond market for small issuance sizes as well as greater structural flexibility.

Privacy and Control

Private placement transactions are negotiated confidentially. Also, public disclosure requirements are limited, compared to those found in the public market. Companies would not be beholden to public shareholders.

Capital Uses

Long-term capital is congruent with a company’s long-term investments. Thus, capital raised from issuing a private placement is most commonly used to support long-term initiatives versus short-term needs, such as working capital. Companies, both public and private, use the capital raised from private placements in the following ways:
• Debt refinancing
• Debt diversification
• Expansion/Growth capital
• Acquisitions
• Stock buyback/Recapitalization
• Taking a public company private
• Employee Stock Ownership Plan (ESOP)

Private Placement Securities

In a private placement, the shares of stock or debt instrument are considered securities under both federal and state securities laws. Consequently, any transaction involving the shares or debt must be registered under such securities laws or be exempt from registration. Typically, the offeror is an emerging growth company that has few capital alternatives, although more mature companies tend to be more successful in this process. Securities laws generally require that offers are made mainly to accredited investors. There are two basic types of private placement offerings:

Private Placement Equity Offering

The company sells partial ownership via the sale of stock or a membership unit in order to raise capital. Equity offerings are preferred by early-stage companies, because there is no set repayment schedule with this offering.

Private Placement Debt Offering

The company raises debt financing by selling a note instrument to investors with a set annual rate of return and a maturity date that dictates when the funds will be paid back to investors in full. A debt offering is similar to a business loan, except the financing is provided by investors instead of an institution.

Although private placements are exempt from full SEC registration requirements, they still must comply with federal and state regulations. The most important private placement rules fall under Regulation D, promulgated by the SEC.

Regulation D Debt Offering

A debt offering involves the sale of a promissory note to investors. The note sets forth the terms and conditions of the loan arrangement between the company and the investor. For instance, the interest rate, payment periods, and maturity date are described in the note. Notes are sold in fractional amounts providing flexibility for accommodating investors. For example, in a typical debt offering the company raises $1,000,000, which might involve the sale of 20 notes at $50,000 per note.

Regulation D: Private Placement Rules and Exemptions

Reg D is a series of six rules, Rules 501-506, establishing three transactional exemptions from the registration requirements of the 1933 Act. Rules 501-503 set forth definitions, terms and conditions that apply generally throughout the regulation. Specific exemptions are set out in Rules 504-506.

Rule 504

Rule 504 is the most popular of the Reg D rules. Raising capital for a small business can be expensive and time consuming, but a private placement under Rule 504 of Reg D can minimize costs and delays while giving the issuer access to debt or equity capital. In a Rule 504 offering, a business can raise a maximum of $1 million in any year. Rule 504 has no prescribed disclosure requirements, no limit on the number of purchasers, and no investor sophistication standards. Offerings that are exempt under Rule 504 are relatively simple to prepare and can generally be undertaken by the offeror without substantial outside professional expenses. The JOBS Act of 2012 allows offerings to be made through any form of general solicitation or advertising. Rule 504 does not mandate that specified disclosure be provided to purchasers. However, the offeror must provide enough information to meet the full disclosure obligations under the anti-fraud provisions of the securities laws.

Rule 505

A Rule 505 offering may not exceed $5 million in any given 12-month period. This exemption limits the number of non-accredited investors to 35, but has no investor sophistication standards and no limit on the number of accredited investors. Rule 505 was adopted by the SEC to provide small businesses more flexibility in raising capital than under Rule 504. If only accredited investors are involved in the offering, there is no specific information the issuer must furnish to investors. However, if the offering involves one or more non-accredited persons, the issuer must furnish all purchasers with the same kind of information specified by Regulation D. As with a 504 offering, prior to the JOBS Act of 2012, this offering could not be made by means of general solicitation or general advertising.

For Rule 505 offerings over $2 million, financial statement conditions include the following:
• Only financial statements for the most recent fiscal year need be certified by an independent public accountant.
• If an issuer other than a limited partnership cannot obtain audited financial statements without unreasonable effort or expense, only the issuer’s balance sheet (to be dated within 120 days of the start of the offering) must be audited.
• Limited partnerships unable to obtain required financial statements without unreasonable effort or expense may furnish financial statements prepared on the basis of federal income tax requirements and examined and reported on by an independent public or certified accountant in accordance with generally accepted auditing standards.
• The issuer must also be available to answer questions by prospective purchasers about the issuer or the offering.

Rule 506

Rule 506 provides an exemption for limited offers and sales without regard to the dollar amount of the offering. There is no ceiling on the amount of money which may be raised. The JOBS Act of 2012 permits general solicitation and advertising. There is no limit to the number of accredited investors, but the number of non-accredited investors may not exceed 35. If only accredited investors are involved in the offering, the issuer is under no obligation to furnish specific information to investors. If the offering involves one or more non-accredited persons, however, the issuer must furnish all purchasers with the same information required by Reg D. Rule 506 requires detailed disclosure of relevant information to potential investors; the extent of disclosure depends on the dollar size of the offering. For offerings over $2 million, the issuer must provide audited financial statements. Offerings under $2 million follow Reg A as a guide, with an additional requirement for a certified balance sheet. The securities sold are restricted under the same stipulations in Rules 504 and 505. A company is required to file a notice of the offering on Form D at SEC headquarters within 15 days after the first sale in the offering. There is no requirement to file the offering memorandum with the SEC.

From an investor’s perspective, here are some important compliance features of Regulation D:
• No offerings are exempt from the anti-fraud and civil liability provisions of the various federal securities laws.
• Issuers are not relieved of their obligation to provide investors with information needed to make any required disclosures not misleading.
• Regulation D provides transactional exemptions to issuers only. An investor whose purchase was exempt from registration cannot resell their interest without establishing an independent basis of exemption.
Pricing and Payment Structure
Private placement debt is predominantly a fixed-income note that pays a set coupon, on a negotiated schedule. Private placements are priced similarly to public securities, where pricing is determined by the U.S. Treasury rate, with the addition of a credit risk premium. Repayment of the principal can be accomplished in several ways, depending on the credit quality and needs of the issuer, such as sinking fund payments (amortization) or “bullets” as well as tailored/bespoke amortization. Interest is typically paid quarterly or semi-annually. A private placement allows for tailored terms and structures to meet the specific financing needs of the issuer.

Selecting a Private Placement Investor

There are important considerations for a company when determining whether to issue a private placement. When choosing a private placement investor or lender, some key characteristics to look for are:
• They are relationship-oriented rather than transaction-orientated. It’s important that they show interest in the businesses they finance as well as work to understand the needs of the business and how it functions.
• Because private placement debt is typically long-term, it is vital for the private placement investor to have the capacity to grow as a financial partner and have the knowledge and experience to help a company navigate during challenging times.
• They are fast-acting, responsive and have access to key decision-makers within their organization.
• The private placement investor demonstrates a constant appetite for private placement debt throughout market cycles and the calendar year.
• They follow through on their commitments.
Ultimately, it is most important to find a private placement investor who can offer financing best fitted for the goals of your business. If you’re interested in issuing a private placement, Ascent Law LLC can help.

Free Initial Consultation with Lawyer

It’s not a matter of if, it’s a matter of when. Legal problems come to everyone. Whether it’s your son who gets in a car wreck, your uncle who loses his job and needs to file for bankruptcy, your sister’s brother who’s getting divorced, or a grandparent that passes away without a will -all of us have legal issues and questions that arise. So when you have a law question, call Ascent Law for your free consultation (801) 676-5506. We want to help you!

Michael

Ascent Law LLC
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States

Telephone: (801) 676-5506

Ascent Law St. George Utah Office

Ascent Law Ogden Utah Office

src=https://sp-ao.shortpixel.ai/client/to_webp,q_glossy,ret_img,w_90,h_90/https://www.ascentlawfirm.com/wp-content/uploads/2014/08/video-pic5-150x150.jpg

About the Author

People who want a lot of Bull go to a Butcher. People who want results navigating a complex legal field go to a Lawyer that they can trust. That’s where I come in. I am Michael Anderson, an Attorney in the Salt Lake area focusing on the needs of the Average Joe wanting a better life for him and his family. I’m the Lawyer you can trust. I grew up in Utah and love it here. I am a Father to three, a Husband to one, and an Entrepreneur. I understand the feelings of joy each of those roles bring, and I understand the feeling of disappointment, fear, and regret when things go wrong. I attended the University of Utah where I received a B.A. degree in 2010 and a J.D. in 2014. I have focused my practice in Wills, Trusts, Real Estate, and Business Law. I love the thrill of helping clients secure their future, leaving a real legacy to their children. Unfortunately when problems arise with families. I also practice Family Law, with a focus on keeping relationships between the soon to be Ex’s civil for the benefit of their children and allowing both to walk away quickly with their heads held high. Before you worry too much about losing everything that you have worked for, before you permit yourself to be bullied by your soon to be ex, before you shed one more tear in silence, call me. I’m the Lawyer you can trust.

Reach out

Find us at the office

Gieser- Madigan street no. 4, 89728 Tokyo, Japan

Give us a ring

Danyelle Malanche
+96 551 917 434
Mon - Fri, 10:00-17:00

Tell us about you