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Private Placement Offering
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What is a Private Placement Offering?

A Private Placement Offering is the "offering" and sale of a company's restricted securities to prospective investors. The regulating agency for a Private Placement Offering is the Securities and Exchange Commission, and depending on the offering, one or more state regulatory agencies. Generally, a Private Placement Offering refers to the offering of securities that are not formally "advertised" to people that you do not know. A Private Placement Offering can be offered to an unlimited number of private accredited, "qualified" or "accredited" investors and a limited number of non-qualified or non-accredited investors.

A Private Placement Offering, while a security, are exempt from registration with the Securities and Exchange Commission, or "SEC" so long as the appropriate offering documentation is prepared in compliance with Federal and State regulations. These documents are usually referred to as "
Private Placement Memorandums."

 






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What is a Private Placement Memorandum?

Private Placement Memorandums (PPM) are confidential sales documents that is provided to a potential sophisticated investor for a private placement of bonds. The PPM contains relevant information about the financial, economic and demographic characteristics of the borrower and its service area. 

More specifically, Private Placement Memorandums provide the investor, in the format of a structured document, the information and data the investor needs to know to make an informed investment decision, including:

* The Private Placement Memorandum's offering format and structure
* The company information and structure of the company
* SEC required disclosures about the securities being purchased
* Information related to the company's business and operations
* Risks involved with the investment
* Senior Management and Company Financials
* Use of proceeds

Private Placement Memorandums also includes the subscription agreement which is the actual "sales contract" for purchasing the securities. The PPM is the document that the investor will sign and send in with his/her investment funds


What is a Regulation D Offering


Regulation D, also known as "Reg D," became effective April 15, 1982. It's one the key SEC exemptions for small businesses that want to raise money by selling its stock. It's also considered a route to taking a company public without the burden and expense of a full registration with the SEC.

Regulation D consists of six basic rules. The first three are concerned with definitions, conditions, and notification. Rule 501 covers the definitions of the various terms used in the rules. Rule 502 sets forth the conditions, limitations, and information requirements for the exemptions in rules 504, 505, and 506. Rule 503 contains the SEC notification requirements. The last three rules deal with the specifics of raising money. Rule 504 generally pertains to securities sales up to $1 million. Rule 505 applies to offerings up to $5 million (including those offerings less than $1,000,000). Rule 506 is for securities offerings with no limit or any dollar amount (including those offerings less than $5,000,000 million). 

Regulation D Offerings Continued

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) provides three exemptions from the registration requirements, allowing some smaller companies to offer and sell their securities without having to register the securities with the SEC. For more information about these exemptions, read our publications on Rules 504, 505, and 506 of Regulation D.

While companies using a Reg D exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what’s known as a "Form D" after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s owners and stock promoters, but contains little other information about the company.

Rule 504 of Regulation D

Rule 504 of Regulation D provides an exemption from the registration requirements of the federal securities laws for some companies when they offer and sell up to $1,000,000 of their securities in any 12-month period. 

A company can use this exemption so long as it is not a blank check company and does not have to file reports under the Securities Exchange Act of 1934. Also, the exemption generally does not allow companies to solicit or advertise their securities to the public, and purchasers receive "restricted" securities, meaning that they may not sell the securities without registration or an applicable exemption.

Rule 504 does allow companies to make a public offering of freely tradable securities but only if one of the following circumstances is met:

The company registers the offering exclusively in one or more states that require a publicly filed registration statement and delivery of a substantive disclosure document to investors; 

A company registers and sells the offering in a state that requires registration and disclosure delivery and also sells in a state without those requirements, so long as the company delivers the disclosure documents required by the state where the company registered the offering to all purchasers (including those in the state that has no such requirements); or 

The company sells exclusively according to state law exemptions that permit general solicitation and advertising, so long as the company sells only to "accredited investors." 
Even if a company makes a private sale where there are no specific disclosure delivery requirements, a company should take care to provide sufficient information to investors to avoid violating the antifraud provisions of the securities laws. This means that any information a company provides to investors must be free from false or misleading statements. Similarly, a company should not exclude any information if the omission makes what is provided to investors false or misleading. 

While companies using the Rule 504 exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what is known as a "Form D" after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s owners and stock promoters, but contains little other information about the company. 


Rule 505 of Regulation D

Rule 505 of Regulation D allows some companies offering their securities to have those securities exempted from the registration requirements of the federal securities laws. To qualify for this exemption, a company:

Can only offer and sell up to $5 million of its securities in any 12-month period; 

May sell to an unlimited number of "accredited investors" and up to 35 other persons who do not need to satisfy the sophistication or wealth standards associated with other exemptions; 

Must inform purchasers that they receive "restricted" securities, meaning that the securities cannot be sold for at least a year without registering them; and 

Cannot use general solicitation or advertising to sell the securities. 

Rule 505 allows companies to decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that generally are the same as those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well. The company must also be available to answer questions by prospective purchasers.

Here are some specifics about the financial statement requirements applicable to this type of offering:

Financial statements need to be certified by an independent public accountant; 

If a company other than a limited partnership cannot obtain audited financial statements without unreasonable effort or expense, only the company's balance sheet (to be dated within 120 days of the start of the offering) must be audited; and 

Limited partnerships unable to obtain required financial statements without unreasonable effort or expense may furnish audited financial statements prepared under the federal income tax laws. 
While companies using the Rule 505 exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what is known as a "Form D" after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s owners and stock promoters, but contains little other information about the company. 

Rule 506 of Regulation D

Rule 506 of Regulation D is considered a "safe harbor" for the private offering exemption of Section 4(2) of the Securities Act. Companies using the Rule 506 exemption can raise an unlimited amount of money. A company can be assured it is within the Section 4(2) exemption by satisfying the following standards:

The company cannot use general solicitation or advertising to market the securities; 

The company may sell its securities to an unlimited number of "accredited investors" and up to 35 other purchases. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated—that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment; 

Companies must decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well; 

The company must be available to answer questions by prospective purchasers; 

Financial statement requirements are the same as for Rule 505; and 

Purchasers receive "restricted" securities, meaning that the securities cannot be sold for at least a year without registering them. While companies using the Rule 506 exemption do not have to register their securities and usually do not have to file reports with the SEC, they must file what is known as a "Form D" after they first sell their securities. Form D is a brief notice that includes the names and addresses of the company’s owners and stock promoters, but contains little other information about the company.

What is an Initial Public Offering?

An Initial Public Offering, or "IPO" is the first sale of stock by a company to the public. 

The purpose of an Initial Public Offering is to generate capital for a business that decides to take the route of equity financing. 

What is Equity Financing?

Companies seek "equity financing" when a company uses its assets or ownership in the company to get cash they need for expansion or continued growth. 

When a company sells its stock through an Initial Public Offering it is, in essence, selling partial ownership in the company. 

One downside to this type of financing is that the company loses some of its control when shares are sold to the public. 

In order to complete a successful Initial Public Offering, an "underwriter" is used to facilitate the process as well as to promote the company's stock to investors and eventually to the public. Another term for an underwriter is an investment bank.

 

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