Although exempt from registration with the Securities and Exchange Commission (SEC), private placements are still regulated by the SEC, primarily under Regulation D of the Securities Act of 1933. While many revisions have been made to Regulation D since its adoption in 1982, some of the basic requirements for a private placement typically include the following:
- Sales only to Accredited Investors (as defined in Regulation D)
- Securities can only be purchased for investment purposes and cannot be resold to the public or in secondary markets
- A company may not use public solicitation or advertising to market the securities
By avoiding the time consuming and expensive registration process and subsequent marketing effort (often called a “road show”) typically associated with a public raise, private placements can offer quicker and less expensive access to capital.
Other advantages include the ability of companies to target investors with particular traits (e.g., longer term investmenfthorizons, compatible interests, strategic value to the company), retention of private status by nonpublic companies, and greater flexibility for public companies in raising capital. Finally, private placements are often the only available source of capital to start-up or developing businesses.