What’s a Private Placement?
A private placement is a “private” offering of securities to a select number of investors meeting certain qualification requirements.
Private placements are an alternative to the costly and time-consuming public registered offering (aka IPO). Most companies rely on the exemptions and guidance under Regulation D (Reg. D) of the Securities Act to qualify their offerings as private offerings exempt from registration.
The three distinguishing features of securities offered through a private placement are:
- The securities are not publicly offered.
- The securities are not required to be registered with the SEC.
- The investors are limited in number and for the most part, must be “accredited”.*
*An investor is considered “accredited” if they meet certain income and net worth qualifications. They’re considered to be more experienced and are the only investors allowed to purchase private placements with certain offerings that rely on advertising.
Being accredited implies the investor has the knowledge, experience, and capital required to make prudent investment decisions and to withstand a potential loss of the investment.
Passed in 2012 and launched in 2016, the JOBS Act was passed by congress to make private investment opportunities more discoverable and accessible to more and qualified investors.
By easing the advertising and solicitation restrictions on private offerings and crowdfunding, the SEC has made it easier for companies to reach out and engage more potential investors than they have ever been able to before the passage of the JOBS Act.
Did the JOBS Act Work?
Without a doubt, the JOBS Act has made private placements more popular than ever as an investment option for qualified investors. There is data to back this up.
The SEC was asked by Congress to prepare a report describing the performance of Regulation D offerings based on available data from electronic filings from 2009 through 2019. This report was presented to Congress and published in August of this year.
Some interesting findings from that report:
- Over the past decade, markets for securities that are exempt from registration under Regulation D has experienced significant growth.
- In 2019, private offerings SURPASSED registered offerings in the amount of capital invested by the investing public. Momentum has been building over the past decade as there has been a steady increase in the number of offerings and amounts raised in Regulation D offerings. In 2019, over $1.5 trillion was reported raised under Regulation D compared to $1.2 trillion through registered offerings.
- Private funds raised more than $11 trillion of the $15.5 trillion sold in Regulation D markets from 2009 through 2019. The rest was raised by public companies, which they’re allowed to do.
- Private funds for which data is available exhibited strong performance during this period, resulting in high market portfolio returns.
- According to the SEC, companies relying on Regulation D exhibit considerable growth potential.
- Issuers in the Banking/Financial, Technology, and Real Estate industries accounted for the most capital raised.
By The Numbers:
It’s clear from the SEC’s data and conclusions that private placements are becoming more and more popular as investment vehicles for investors seeking an alternative to Wall Street. It’s amazing that in 2019, more investors committed capital to private placements than they did through IPOs.
This SEC report backs up what we have always known about the value of investing in private placements:
Private placements offer many advantages that public offerings don’t including:
- Cash Flow.
Besides, private markets uncorrelated to Wall Street offer investors returns shielded from volatility and subject to less risk – usually backed by a tangible asset.
Discover for yourself why investors are abandoning the stock market in droves for private placements.