Private placement
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A private placement is a direct private offering of securities to 35 or fewer investors [1] and sophisticated investors as defined by Rule 501 of the Securities Act of 1933. It is the opposite of a public offering. Investors in privately placed securities include insurance companies, private equity funds, pension funds, mezzanine funds, stock funds and trusts. Securities issued as private placements include debt, equity, and hybrid securities.
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[edit] Features
Private placements cannot have general solicitation [2]are typically marketed geared toward and purchased by a relatively small number of investors compared to a public offering. Secondary market activity is comparatively weak, most investors buying the security and holding to maturity. because the securities that typically come out in a private placement are restricted (cannot be sold into a public market. See Rule 144 of the Exchange Act) unless by operation of State law under a Rule 504 of Regulation D.
Private placements of debt and hybrid securities can be undertaken without a rating by a recognised credit rating agency, whereas investors in public offerings typically require credit ratings from at least one and usually two agencies. Protection for the investor is provided by the inclusion of significantly more covenants than would normally be found in a public offering.
Private Placements usually do not require a CUSIP number (Committee on Uniform Securities Identificatio Protocol) because they are not publically traded but can acquire a PIN (Private Placement Identification Number) which is the private equivalent and offered by the same organization (CUSIP.com).
Because private placements are negotiated directly between the issuer and a small number of investors, the issuance can be tailored to meet the funding needs of the issuer and/or the investment needs of the purchaser. Thus private placements may contain multiple tranches and even multiple currencies.
[edit] Markets
Private placements can be undertaken in any major currency, although the United States private placement market is by far the largest.
[edit] United States
In the United States, private placements are exempt from public registration under the Securities Act of 1933 other than the filing of a Form D with the Securities and Exchnage Commission and required State filings for a Rule 504 placement. The exemption from registration for a private placement is contained in Regulation D of the Securities Act of 1933. While the procedure for conducting a private placement pursuant to the exemption is less stringent than for that of a public offering The process requires a careful compliance with the terms and restrictions of Regulation D.
Those requirements typically require the use of a private placement memorandum or prospectus under rule 424, which, for all practical purposes, complies with the requirements of a prospectus which is required in public offerings. The important aspects of the offering are covered: a description of the terms of the offering, the company's business, financial statements, management's discussion and analysis (also know as plan of operation), risk factors, management biographies, additional terms (i.e., antidilution protection, registration rights, control features), expenses of the transaction and summary financial information. The purpose of the summary is to make the offering easy to read and understand. There is a "plain English" rule so as to make the memorandum easier to read. As stated, suppliers of capital are inundated with business plans and private placement memoranda; the sales-conscious issuer must get all the salient facts in as conspicuous a position as possible if he hopes to have them noticed.
Issuers should approach modification of the material terms of the offerings that have stated maximums and minimums with caution. The SEC has made its position clear. If the issuer elects to make a material change (a fact which an investor would find relevant in their decision making process)in the terms of the offering, each of the investors who have signed subscription agreements must consent to the change in writing. It is not open to the issuer toThe Issuer cannot send out a notice to the effect that "We are raising or lowering the minimum and, if we do not hear from you, we assume you consent."
Regulation D is a government program section created under the Securities Act of 1933, instituted in 1982, that allows companies the ability to raise capital though the sale of equity or debt securities. The programs were designed to provide a forum to raise capital for small business entitiesprovide two main things - an exemption to sell securities in a private transaction without registering the securities (something that happens in any transaction involving investors) and the appropriate framework and documentation for doing so properly. Regulation D Offerings are the practical method companies use to raise capital from individual investors. Who should use a Regulation D Offering? Any company or entrepreneur that is seeking to raise equity or debt capital from investors.
There are 2 basic types of Regulation D Offerings that can be structured:
An "equity" offering is where the company sells partial ownership in the company (via the sale of stock or a membership unit) to raise capital. Equity offerings are preferred by early stage companies because there is no set repayment schedule or debt service payments. - the investors profit when the company profits. A "debt" offering is where the company raises debt financing by selling a note debt 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 functions much like a business loan except instead of a bank providing the financing it is a group of investors lending funds to the company.
Preparing a Regulation D Offering is very straightforward. It involves three primary steps:
1. Pre-Offering Structuring: Most entrepreneurs are not experts in raising capital - and thus typically have poorly structured transactions. An improper or non-existent transaction structure will portray a very unprofessional image of you to potential investors. Thus, the very first step in an offering is properly setting the transaction structure and, in equity transactions, company share structure.
Pre-offering structuring typically includes such items as setting share price or note amount, determining how much of the company to sell (in equity situations), which Reg D program to use, setting the maturity date and annual rate of return for corporate notes (in debt situations), share allocations to principals so they maintain a set amount of control in the company, minimum and maximum offering amounts which set the effective range of the offering, minimum amount of investment per investor, etc.
2. Document Creation: Step two of preparing an offering involves the creation of the related Regulation D offering documents. These documents include:
Private Placement Memorandum: The Private Placement Memorandum, or "PPM", is the document that discloses all pertinent information to the investors about the company, proposed company operations, the transaction structure (whether you are selling equity ownership or raising debt financing from the investors), the terms of the investment (share price, note amounts, maturity dates, etc.), risks the investors may face, etc. Do not confuse the detailed disclosures and transaction structure in a PPM with the general information a business plan provides - they are not the same.
Subscription Agreement: The Subscription Agreement sets forth the terms and conditions of the investment. It is the "sales contract" for purchasing the securities. It is practically impossible to raise capital without this document - investors are not going to invest into your company or opportunity based on a handshake. Would you invest into a company without having the terms and conditions of the investment set in writing and agreed to by both parties?
Promissory Note: In debt offerings you need to have a Promissory Note outlining the terms of the loan arrangement with the investors. The note is the actual "loan document" between the company and the investor.
Form D SEC Filing: The Form D is the notification filing that is sent to the SEC in Washington, DC for 505, 506, and the new 507 offerings, while the 504 offerings must also be registered with and pursuant to the State where the securities are being sold. It notifies the SEC that you are using the Regulation D program and provides them basic information on the company and the offering. It is not an approval document or registration - it is merely a filing that notifies the SEC that you have a Regulation D Offering in place.
3. Marketing: The offering is now ready for marketing to investors.
A Regulation D Offering will solve all of the technical issues you will face when dealing with investors (investment structure, investment documentation, etc.) - these are issues that should be addressed before you interact with investors. Not addressing them ahead of time presents a very unprofessional image of you to the investor.
The Regulation D Programs can be used by domestic as well as foreign corporations. While the programs can be used by any most corporation types - the preferred structure is a stock "C" Corporation or Limited Liability Corporation "LLC".
By Luiz Fernando Saife Salemi: In the US, rating agencies such as Moody's and S&P rate private placements, but they are not used to monitoring it, given that most of the buyers of a private placement are institutional investors.
[edit] References
- Monk, Jocelyn and Dick, Alan. The appeal of private placements. The Association of Corporate Treasurers.
- Moorfield,Andrew. Debt finance on the quiet. The Association of Corporate Treasurers.
