Written by attorney Peter Jay Wilke

What Is a Private Placement Securities Offering?

During the Great Depression; no, the one back in the 1930's, not what we're going through now, Congress passed the Securities Act of 1933 (often called the "33 Act" by those in the know). This law was designed to provide some governmental oversight on how capital was raised. The Securities Exchange Act of 1934 followed, creating the Securities and Exchange Commission ("SEC') while mandating a system of periodic financial reporting for companies wanting to sell their securities to the public.

Basically, the 33 Act was designed to curb fraudulent investment sales practices. It mandated what became known as "material disclosure" and required those companies wanting to sell securities to register the security with the SEC. This meant filing a "registration statement," the heart of which was the prospectus actually delivered to the investment prospect. The SEC staff would review the registration statement and submit comments to the offering company, often called the "registrant." Once the SEC staff was satisfied, the offering company, or "issuer" would receive a starting date and would take it from there. This is a very simplified overview; don't submit this as the answer to your law school exam question on the "33 and 34 Acts," you'll be disappointed with your professor's response.

Anyway, Congress recognized that not everyone could afford all the resources necessary to prepare and file a registration statement, including attorneys and accountants. And - in many cases where the company was small and/or new, it was unlikely there'd be many stock purchasers, never mind whether the company could get on a stock exchange in the first place.

So, Congress added a section to the 33 Act we affectionately refer to as the private placement exemption. It's found in section 4(2) of the 33 Act. Over time, these private offerings became known as "section 4(2) offerings." This means that an offering company can follow certain established rules and sell its security without having to take the time and expense to register it with the SEC (and relevant state securities regulators as well).

This "exemption from registration," states very simply that the exemption is for "transactions by the issuer not involving any public offering." Court decisions interpreting this clause provide generally that the private offering cannot be made through public means of solicitation. The quest for investors must be accomplished through private means of solicitation; personal contacts, business associates, family, that sort of thing. Cold calls, advertising were (and are) not permitted.

Section 4(2) case law provides that an offeree must have access to the same material information about an offering entity that would be provided in a prospectus. The investment prospect should have some degree of investment sophistication as well as agree not to resell the investment to the public.

Over time, the SEC has promulgated rules providing more clarity and guidance for section 4(2) and the case law interpreting it. These rules are sometimes called "safe harbors," because compliance also assures proper use of the 33 Act exemption from registration.

There are other exemptions from registration within the 33 Act. However, for our purposes, we're focusing on section 4(2).

Two well known sets of rules involving private placement securities are Regulation D and Rule 144 of the SEC. Regulation D provides definitions of 2 main classifications of investors, accredited and non-accredited, that help shape the permitted number of investors in an offering as well as the content of material disclosure in the offering documentation (usually called a private placement memorandum; "ppm"). Regulation D has 3 main rules; 504, 505 and 506, providing for different sizes of investment offerings and other guidance. Check out my Legal Guide on Rule 506; it's around here some place.

Rule 144 establishes time lines and other criteria for the removal of the restrictive legend on private placement stock certificates, allowing for sale to the public (otherwise not permitted under section 4(2) case law). In small company settings, these stocks are often traded in regional stock markets and on OTC Markets, a private online company that provides an avenue for underdeveloped, growing (at least in theory) entities to list their stock for sale.

Generally, private placement offerings take less time and money to prepare. If you have some idea of who you might approach to sell your offering once it's ready, and/or know people who can assist you - go for it and keep on truckin."

Additional resources provided by the author

Free Q&A with lawyers in your area

Can’t find what you’re looking for?

Post a free question on our public forum.

Ask a Question

- or -

Search for lawyers by reviews and ratings.

Find a Lawyer