Contemplating a Private Placement? Everything You Need to Know.

Posted on 12-09-2016 by
Tags: Lexis Practice Advisor , private placement

Lexis Practice Advisor provides an overview of private placements, as well as detailed practice notes, forms and checklists on this topic.

Under the Securities Act of 1933, as amended (Securities Act), any offer or sale of securities must either be registered with the U.S. Securities and Exchange Commission (SEC) or qualify for an exemption from the registration requirements. Registration is a time-consuming and complex process, which involves extensive documentation and disclosure about the issuer and its business. The process of preparing a registration statement, together with due diligence and the SEC review process, often takes several months. However, the Securities Act contains a variety of exemptions from the registration requirements for certain types of transactions, and in contrast to the registration process, a private placement under one of these exemptions takes less time and effort.

Section 4(a)(2), which is known as the “private placement exemption”, exempts from the registration requirements of the Securities Act transactions by an issuer not involving any “public offering”. Although the SEC has not defined “public offering”, case law and the SEC have established certain requirements including:

  • Limited offerees
  • Sophisticated investors
  • Transfer restrictions on securities purchased

In addition, Regulation D, under three separate rules, provides a non-exclusive safe harbor exemption from the registration requirements for certain securities offerings under the Securities Act:

  • Rule 504 covers offerings up to $1 million in a 12-month period without limiting the number or type of investors.
  • Rule 505 covers offerings of up to $5 million to an unlimited number of accredited investors and up to 35 non-accredited investors.
  • Rule 506has two separate sub-sections with no limit on the amount of money an issuer can raise:
    • Rule 506(b) is for offerings of up to 35 non-accredited investors.
    • Rule 506(c) is for offerings to an unlimited number of accredited investors only.

While there is no registration requirement for companies relying on Regulation D, they need to file a Form D within 15 days for offerings under Rule 504, 505 or 506. Although Regulation D provides a non-exclusive statutory safe-harbor, depending on the issuer and the nature of the offering, an issuer may still choose to rely on the exemption provided under Section 4(a)(2).

Counsel should be aware of federal and state laws, general process and timeline and key transaction documents and issues related to private placements. The following resources provide guidance for all aspects of a private placement.

Overview of the Private Placement Process

The following resources provide an overview of the private placement process and identify key issues that counsel should be aware of when working on a private placement transaction.

State Securities Regulation

In addition to complying with federal securities laws, each securities transaction must comply with state securities laws, which are referred to as “Blue Sky” laws. Each state has its own set of Blue Sky laws, regulating the offer and sale of securities and the licensing of securities intermediaries such as broker-dealers. The following resources provide guidance for key aspects of state securities regulation.  

Stock Exchange Requirements

A private placement can risk triggering the shareholder approval requirements of the exchange on which the shares are listed. Counsel should be aware of rules regarding transactions that can trigger shareholder approval requirements, including the 20% rule, which is discussed in the following resources.

Due Diligence

The following resources provide guidance on the due diligence process for a private placement.

Issuer Resolutions and Approvals

The following resources relate to various issuer resolutions and consents required to approve the private placement.

Key Documents

The following resources relate to the preparation of the agreements and key documents necessary to execute the private placement.

FINRA Regulations

The following resources provide an overview of the requirements of the Financial Industry Regulatory Authority (FINRA), which provides regulations on the underwriters participating in the private placement.

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