Legal Definitions - private placement

Private placements are a way for companies to offer securities (like stocks or bonds) to specific investors, such as institutions or wealthy individuals, without having to go through the process of a public offering. This means they don't have to file a registration statement with the Securities and Exchange Commission (SEC).

For example, a company might want to raise money by selling shares of stock, but they don't want to go through the time and expense of an initial public offering (IPO). Instead, they can offer those shares to a select group of investors through a private placement.

Private placements are regulated by the SEC under Regulation D. There are two main types of private placements under Regulation D:

• Rule 504: Companies can privately place up to $5,000,000 with minimal restrictions.
• Rule 506: There is no cap on the offering value, but issuers must meet other restrictions. There is a maximum of 35 investors who must qualify as sophisticated investors, but accredited investors are excluded from the 35-investor ceiling. Additionally, under Rule 506, issuers may not generally solicit their offering.

The most common reason for a private placement is to raise capital without having to go through the highly regulated process of a public offering. Companies that want to raise more than $5,000,000 often rely on Rule 506 and offer their securities to large financial institutions, such as investment banks.