A private placement offering, or a private placement securities offering, is a common way for a company to raise capital through the sale of securities without the need to register and comply with costly and burdensome registration requirements that are otherwise applicable to public securities offerings. These securities can be stocks, bonds or other instruments, such as shares or membership interests in limited partnerships (LPs) and limited liability companies (LLCs).
In a public offering, the company typically engages a brokerage firm to act as its lead underwriter. The lead underwriter will often assemble a group (or syndicate) of underwriters who will engage in advertising and other active selling efforts in an attempt to fully sell out the offering. The company must pay the underwriters a commission, or spread, out of the offering proceeds.
The Securities Act of 1933, a Federal securities law, requires that a public offering be registered with the Securities and Exchange Commission (“SEC”). Registration entails a lengthy and costly process of preparing and filing a registration statement. This includes an offering prospectus that provides extensive disclosure about the company, the securities and the terms of the offering. The disclosure has to follow certain SEC-established guidelines. There are also financial statement requirements, including significant costs of auditing and filing fees required to be paid to both the SEC and the Financial Industry Regulatory Authority (FINRA). Additionally, in most cases after a company successfully conducts a public offering of securities, the company will be required to bear the costs of periodic financial reporting and filing with the SEC (e.g. Form 10-K, 10-Q, 8-K). All of these costs are expenses of the company that cannot be used toward the intended business purpose and therefore dilute investors’ interests in the company.
However Federal law (Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D) allows companies to engage in a private placement offering, so long as purchasers of the securities are limited to people who have sufficient wealth, investment knowledge or sophistication, or access to information that would presumably allow them to make completely informed investment decisions. A private placement offering can be made to an unlimited number of “Accredited Investors.” Non-Accredited Investors must have a certain level of investment sophistication and the company is required to provide extensive disclosure, at least comparable to the disclosure that would be provided in a public offering prospectus. For this reason, most private placement offerings are limited to Accredited Investors.
What is an Accredited Investor?
To qualify as an Accredited Investor, you must:
- Have a net worth, not including your primary residence, of a least $1 million; or
- Have an income exceeding $200,000 in each of the two most recent years, or joint income with a spouse exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year.
In certain cases (Rule 506(c) private placement offerings involving a general solicitation of the offering), an Accredited Investor may be required to obtain a verification of his/her accredited status. Verification is obtained by having an outside accountant or attorney issue a letter to the company stating that it can verify the investor’s accredited status after reviewing current tax returns and related financial information.
Companies raising capital through private placement offerings often have limited or no operating history and more modest revenue streams than larger companies that can bear the costs of going public and being a public reporting company. These offerings are not reviewed by the SEC or state securities regulators for adequacy of disclosure, and financial statements need not be audited. There are also no specific disclosure requirements so long as the offering is made to Accredited Investors. Thus, it is incumbent on the private placement investor to carefully review all information provided, ask questions and receive satisfactory answers before making an investment decision.
All of the offerings displayed on the Acquire portal are private placement offerings. When an investor completes his or her profile on the Portal and certifies its accuracy, Acquire has sufficient basis to reasonably believe the individual is an Accredited Investor. In the case of a Rule 506(c) offering, additional steps may be required such that the investor’s accredited status is deemed to be verified.
The Acquire team underwrites and pre-funds every investment opportunity before it’s displayed on the Portal and open to investment by approved Accredited Investors—this means Acquire has “skin in the game.” When displaying an investment opportunity on the Portal, the Acquire team provides extensive disclosure information based on its own due diligence and underwriting of the opportunity offered by the project Sponsor.
As with any investment, public or private, each investor is urged to review all disclosure materials provided and ask any questions. If you do not receive responses to your satisfaction, do not make the investment. Projected returns may be provided for your convenience. Past performance is not a predictor of future returns. Actual returns are subject to all underlying assumptions, the performance of each underlying project Sponsor, and general economic conditions. Investors are urged to read every risk factor displayed with each investment opportunity.