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Private Placement Investing

Gain access to privately held securities through private placement. In some cases, this type of investment has the opportunity to bring higher returns than other traditional types of investments.

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What are Private Placements?

A private placement is an offering of unregistered securities to a limited pool of investors. With this, investors are able to buy shares to a closed group of investors rather than through the open market.

In a private placement, a company sells shares of private placement stock or funds in the company in exchange for cash. This type of investment allows investors to purchase shares of entities, like hedge funds, oil and gas funds, and private stock that isn’t publicly traded or registered with the SEC.

NAVIGATION TIP:

Do your due diligence before investing in private placements. Because these often aren’t regulated by the SEC, your initial investigations are extra key.

Structure

A private placement can be structured in the form of private stock or a private fund. These structures can reduce costs and reporting obligations while allowing management to have a greater degree of control over the company.

In contrast, an initial public offering can be expensive and require significant preparation to ensure the company’s financial statements meet certain accounting standards. There are many other requirements that public companies have (disclosures, earnings releases, and public regulatory filings) that private companies or funds are not required to perform. This can be a selling point for some investors.

Restrictions

Private placement products are illiquid and typically restricted. Restricted means investors cannot resell them without registration or an applicable exemption under the securities law. The company must also file a brief notice of the offering with the SEC. Stocks in closely held companies may not go through the registration process. Any change in ownership follows the guidelines established in the governing documents.

Private Placement Types

Private placement alternative investments vary in type, rules, structures and more.

  • Reg D Funds: Some private placements are regulated by a series of U.S. Securities and Exchange Commission rules known as Regulation D (Reg D). Under Reg D, companies can issue varying amounts of securities based on the type of investor the private placement is sold to—accredited or non-accredited investors—without registering those securities with the SEC.
  • Private Stocks: Private stocks allow investors to invest in private companies rather than publicly traded ones. Buying shares in a private company is a bit more complicated of a process and all purchases must be approved by the issuing company.
  • Private Equity: Private equity refers to a class of investments and investors who invest in non-public entities, often in large dollar amounts.
  • Angel Funds: Angel funding is similar to private equity funds in the fact that it’s a class of investor. But where private equity investors put huge amounts of money into established businesses, angel investors specialize in early-stage businesses or start-ups. The fund is a pooled amount of money from “angel investors.”
  • Hedge Funds: Hedge funds are pooled investment funds that work to earn active returns for investors. Hedge fund investors must be “accredited investors” meaning they need to have a large net worth or are in good standing. These funds are similar to mutual funds and other funds, except they face less regulation and are often more expensive.
  • Oil & Gas Funds: Often called Oil ETFs or Gas ETFs, these funds invest in companies that work in the oil and gas industry. They invest in things like options or futures associated with business activities. Many investors find the oil industry to be very attractive as it embodies a massive industry, but it’s known for being very complex and volatile.

How To Buy Private Placements

More so than many other alternative investments, private placements require quite a bit of upfront research and due diligence. Here are a few of the things you need to consider before investing in this type of strategy:

  • Limits: Ask if there are waiting periods for when you can sell or withdraw funds. Some have limits and penalties on how and when they can be sold. If you’re close to retirement age, this is extra important.
  • Taxation: See if earnings are taxable to the IRA. If the investment is deemed to generate income that is not substantially related to the tax-exempt purpose of the IRA (like saving for retirement), that income may be taxable.
  • Eligibility: As mentioned above, some private placements dictate that only “accredited” investors can invest in the funds. See if that applies to the ones you’re interested in.

Investors are encouraged to do adequate research or contact a broker/financial advisor, attorney or CPA to determine if private placements are an appropriate investment. Once you have determined that a private placement is suitable for you, it can be purchased with your Self-Directed IRA or another retirement account at Mainstar Trust. Click here to find out how to use a Mainstar Trust account to invest in a private placement.

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