A private placement is an offering of unregistered securities to a limited pool of investors. In a private placement, a company sells shares of stock in the company in exchange for cash. A private placement can be structured as a private stock or fund.
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.
A private placement can be structured in the form of private stock or a private fund. Private placement investments whether private stock, hedge funds, oil and gas funds and others allow the purchase of shares that are neither publicly traded nor registered with the SEC. 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) which private companies or funds are not required to perform.
Private placement products are illiquid and typically restricted. This 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 corporate governing documents.
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 other retirement account at Mainstar Trust. Click here to find out how to use a Mainstar Trust account to invest in a private placement.