Private placements are sales of unregistered securities that typically represent an interest in a firm or organization, such as a partnership or limited liability company (LLC). (Legally, an interest in a firm or organization may or may not be considered a security.) Securities sold in private placements are not required to be registered under federal and state securities laws, although other regulations apply. Under Regulation D of the federal securities laws, private placements can be sold only to “accredited” investors and a limited number of other investors. (An “accredited” investor can be a company, a pension fund, a trust, a corporate director or officer, or a natural person who meets established net worth or annual income criteria.) If the number of “unaccredited” investors exceeds the specified limit under the Regulation D registration exemption, the securities offered for sale must be registered under federal securities laws. Private placements may be offered by private or public companies. Hedge funds raises capital through private placements. Written materials that accompany an investment in a private placement typically include a private placement letter, an offering memorandum, a prospective purchaser questionnaire, a subscription agreement, or other similar documents.
Unregistered securities are not subject to the reporting and disclosure requirements of the federal securities laws. In many cases, detailed financial information on private placements is not disclosed and the requirement of a prospectus is waived. Investments in private placements can be highly speculative and uncertain due to the lack of reported financial information. Participants in private placements are usually institutional investors (i.e., banks, mutual funds, insurance companies, pension funds).