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private placement
offerings
Private Placement Offerings in Irvine, CA
ADVANTAGES AND DISADVANTAGES Of a private placement
Private placements offerings in Irvine, CA, gives small businesses a number of advantages over IPOs. Since private placements do not require the assistance of brokers or underwriters, they are considerably less expensive and time-consuming. In addition, private placements may be the only source of capital available to risky ventures or start-up firms.
A private placement may also enable a small business owner to hand-pick investors with compatible goals and interests. Since the investors are likely to be sophisticated business people, it may be possible for the company to structure more complex and confidential transactions. If the investors are themselves entrepreneurs, they may be able to offer valuable assistance to the company's management. Finally, unlike public stock offerings, private placements enable small businesses to maintain their private status.
Of course, there are also a few disadvantages associated with private placements of securities. Suitable investors may be difficult to locate, for example, and may have limited funds to invest. In addition, privately placed securities are often sold at a deep discount below their market value. Companies that undertake a private placement may also have to relinquish more equity, because investors want compensation for taking a greater risk and assuming an illiquid position. Finally, it can be difficult to arrange private placement offerings in multiple states.
what is a private placement Of securities
Private placement occurs when a company makes an offering of securities to an individual or a small group of investors. Since such an offering does not qualify as a public sale of securities, it does not need to be registered with the Securities and Exchange Commission (SEC) and is exempt from the usual reporting requirements. Private placements are generally considered a cost-effective way for small businesses to raise capital without "going public" through an initial public offering (IPO).
exemptions for private placements
- Regulation D Rules 504, and 506
- Regulation D Rules 506(b)
- Regulation D Rules 506(c)
- Exempt Offerings under Section 4(a)(2) of the Securities Act of 1933
- Exempt Offerings under Section 4(a)(5) of the Securities Act of 1933
- Exempt Offerings under Section 4(a)(5) of the Securities Act of 1933
- Offerings under California Corporations Code Sections 25102 (f) and (n)
- Intrastate Offerings Pursuant to Rule 147
- Regulation S Offering to Foreign Investors
- Rule 144A Offerings to Qualified Institutional Buyers or QIBs
- Experienced
- Reliable
- Insightful
summary charts of exempt offerings
RESTRICTIONS AFFECTING PRIVATE PLACEMENT Offerings
The SEC formerly placed many restrictions on private placement transactions. For example, such offerings could only be made to a limited number of investors, and the company was required to establish strict criteria for each investor to meet. Furthermore, the SEC required private placement of securities to be made only to "sophisticated" investors—those capable of evaluating the merits and understanding the risks associated with the investment. Finally, stock sold through private offerings could not be advertised to the public and could only be resold under certain circumstances.
In 1992, however, the SEC eliminated many of these restrictions in order to make it easier for small companies to raise capital through private placements of securities. The rules now allow companies to promote their private placement offerings more broadly and to sell the stock to a greater number of buyers. It is also easier for investors to resell such securities. Although the SEC restrictions on private placements were relaxed, it is nonetheless important for small business owners to understand the various federal and state laws affecting such transactions and to take the appropriate procedural steps. It may be helpful to assemble a team of qualified legal and accounting professionals before attempting to undertake a private placement.
Many of the rules affecting private placements are covered under Section 4 of the federal securities law. This section provides an exemption for companies wishing to sell up to $5 million in securities to a small number of accredited investors. Companies conducting an offering under Section 4(a)(2) cannot solicit investors publicly, and the majority of investors are expected to be either insiders (company management) or sophisticated outsiders with a preexisting relationship with the company (professionals, suppliers, customers, etc.). At a minimum, the companies are expected to provide potential investors with recent financial statements, a list of risk factors associated with the investment, and an invitation to inspect their facilities. In most respects, the preparation and disclosure requirements for offerings under Section 4(2) are similar to Regulation D filings.
DISCLOSURE
Although the 1992 SEC revisions eliminated the requirement for companies to prepare a Private Placement Memorandum for investors, experts suggest that it is still a good idea. The memorandum should describe the business, provide background information on management, discuss the terms of the offering (including the number of shares available, the price, and the intended use for the funds), outline the company's capital structure before and after the sale of securities, disclose the opportunities and risks involved in the investment, and provide copies of financial statements. Overall, the level of disclosure should be consistent with applicable state and federal securities laws, as well as with the sophistication of potential investors and the complexity of the terms of the offering.
A series of documents known as subscription materials should also be included with the information sent to potential investors in a private placement transaction. Subscription materials consist of two major documents that investors sign to indicate their desire to subscribe to purchase the securities offered. One of these documents is the offeree and purchaser questionnaire, which asks for background information about the investor to determine his or her level of sophistication. The second document is the subscription agreement, which is a contract showing that the investor has reviewed the offering information, is aware of the risks involved, and wants to invest.
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* We provide a free initial consultation for exploration of Regulation A+, Regulation D, Rule 506, other Exempt and Registered Offerings, potential stock broker U5 and stock broker fraud cases. When the consultation is specific to answering and solving your immediate legal question, we will charge by the hour and advise you in advance.
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