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SEC Private Placement

SEC Private Placement

How to Raise Funds Through Securities Without Taking Your Company Public

If you want to raise funds in the U.S. via selling securities in your business, but don’t want to take your company public, then a Private Placement might be way forward. This type of offering helps you gain capital from a select group of private investors who buy equity or debt from your company.

The Private Placement market is incredibly large in America – according to the U.S. Securities and Exchange Commission, the amount raised through unregistered securities offerings was over $3.0 trillion in 2017. But, many entrepreneurs are unaware of the potential for this type of fundraising.

In this guide, we’ll take a look at the main features of Private Placements and whether they would be advantageous to your business.

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What is a Private Placement?  

A Private Placement is a way to raise funds via selling securities to a (usually small) number of private investors. Because it is a private arrangement securities are not made available on the open market in the same way you would make a public offering. Instead, a business can offer a limited amount of securities to a small number of qualified investors. 

Generally speaking, U.S. securities laws require that all sales must be registered with the Securities and Exchange Commission (SEC) unless an exemption is sought for a Private Placement. Business owners who want to take advantage of this exemption gain it under Regulation D of the 1933 Securities Act – which has led to SEC Private Placements sometimes being referred to as a “Reg D Offering.”

A Private Placement offering will generally target small groups of accredited investors. This is because the SEC needs to ensure that investors are able to afford to make high-risk investments. An accredited investor in the U.S. is someone who has made at least $200,000 or $300,000 jointly as a married couple each year for the past two years, with the expectation that this income level will be maintained, or an individual or married couple who have a net worth of over $1,000,000 excluding their primary residence.

There are exceptions to the need to use accredited investors under rules 505 and 506 of Regulation D which allows up to 35 non-accredited investors. However, using non-accredited investors can leave you subject to additional disclosure requirements.

Because the offering you make is private you are not allowed to advertise securities in the form of using press releases, advertising, mass emailing or mailing, or any other form of marketing that could be construed as advertising publically. Instead, your group of investors should be drawn from existing contacts or from those that you are put in touch with privately.

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Why Would You Use a Private Placement?

Growing companies might choose to raise capital via a Private Placement instead of other options such as taking the company public for a variety of reasons. The main advantage of choosing a Private Placement is that it allows you to avoid having to register your offering with the SEC. Registering with the SEC involves complying with strict disclosure requirements and has to be supported by an underwriter – this can make it extremely costly and time-consuming.

Both publicly listed and private companies can use a Private Placement, although it is more common for private companies to use one. A “PIPE” – Private Investment in Public Equity – is a private offering of securities in an already public company. These kinds of transactions allow investors to enter into purchase agreements and usually require the filing of a resale registration agreement. 

Private Placements are attractive to many investors because of their potential for high-yields. Because they are higher risk than some other forms of investment, issuers tend to offer better incentives to investors. This may take the form of a discount on the price of shares or a warrant that allows investors to buy more shares at a future time on a previously agreed upon price.

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Pros and Cons of a Private Placement 

A Private Placement is a relatively quicker process than an IPO and requires less ongoing public disclosure. Other advantages to raising funds via a Private Placement include:

  • Minimal regulatory requirements speed up the process of raising funds without being subject to frustrating disclosure requirements. Because you don’t have to register your offerings with the SEC you can also avoid costly underwriter fees.
  • Because you can keep disclosure requirements to a minimum you do not have to open up your company to public scrutiny.
  • You do not need to create an investment prospectus to the public which can be a lengthy process.
  • Private Placements can offer more in terms of flexibility, allowing you to tailor the investments to suit your needs.
  • There is usually no minimum requirement for the amount you can accept in investments.
  • Private Placement bonds do not require credit-agency ratings to be sold to investors.


These advantages make Private Placement an attractive option for young and growing businesses and a popular choice amongst many business-owners. However, despite their advantages, there are some drawbacks to choosing to use a Private Placement:

  • A Private Placement is a high-risk investment which means you will often have to pay higher interest rates on bonds you offer investors. This is because privately placed bonds are not given ratings so it can be hard for investors to assess the risk of investing. Therefore, you have to be prepared to offer investors a premium in exchange for taking on that risk.
  • You will relinquish some control over your company in the form of equity if you choose an equity offering.
  • You are limited in the number of investors you can reach because you are offering them to a smaller and more select group. This may make it trickier to attract the right investors.

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The Details – How to set up a Private Placement Offering

Once you have a group of investors interested in a Private Placement there are a few steps you will generally take to complete the transaction. Typically, this process can take around 6-8 weeks, although this timeframe may vary depending on the size of your business and the private placement investors.

You will need to decide whether you want to offer a debt offering or an equity offering. A debt-offering can take the form of promissory notes, convertible debt or a bond offering, or an equity offering can be offering in the form of things like stock or shares in your company.

The general steps you will take when completing a Private Placement are:

  • Deal Launch. This is a process that begins the window from which the issue is offered to the group of investors, to when a decision is made on whether to invest or not. Typically, this lasts for 1-3 weeks.
  • The creation of a Private Placement Memorandum (PPM) & Subscription Agreement. A PPM includes the kinds of information you would include in a registration filing with the SEC and aims to inform potential investors about all of the facts and risks associated with the investment. A Subscription Agreement sets out details on how potential investors can invest in the securities you are offering.
  • You and your investors will have a series of discussions about the details of the proposed investment.
  • Due Diligence. Investors complete due diligence on your company and the investment opportunity by reviewing your financial statements, meeting with your management, conducting industry analysis, or seeing business plans.
  • Risk Analysis. Investors at this stage may want to conduct their own credit rating analysis or other financial investigations to ensure they understand your current financial situation and how capable you are of making payments on a debt offering.
  • Completion of the Private Placement.

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Private Placement Memorandum

A Private Placement Memorandum (PPM) is a legal document that can serve as a risk mitigation tool for investors. It sets out what you are offering to investors and the risks involved, and shows that you have given all the relevant details – “Material Facts” to investors so they can make an informed decision about investing.

A PPM is not technically mandatory for a Private Placement but it is considered “best practice” and is a key part of protecting you as well as your investors from potential misunderstandings or misinterpretations later down the line – so it’s important you use one.

A PPM costs around $20,000 if being drawn up by a competent lawyer (which is highly recommended) so you should factor this cost into your financial plans for the Private Placement process.

A PPM sets out the details of your company that can help investors decide whether they want to invest or not. Typically, it would include details such as:

  • Details of your business such as your industry, the types of products and services you provide, financial statements and economic projections, and details about your management team.
  • An opening summary that lays out what you are offering with your Private Placement.
  • A breakdown of how you will use the proceeds from the Private Placement. This does not have to be set in stone – you can build in a degree of flexibility, but it is a good idea to let investors know how you plan to use the capital to grow your business so they can have confidence about your future prospects.
  • Risk factors of the offering. It is important to be honest about these factors as this will help protect you should things go wrong at a future date.


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Other Factors to be Aware of

It’s important that the investors that you enter into a Private Placement offering with are purchasers that are capable of evaluating the merits and risks associated with the investment opportunity. For this reason, most businesses are advised to use Accredited Investors rather than unaccredited investors. If your investors are not accredited they must be considered “sophisticated” by the SEC.

A Private Placement can gain investment from an unlimited amount of Accredited Investors and up to 35 “sophisticated” non-accredited investors. One way to ensure that your investors can be considered sophisticated is to ensure they complete a questionnaire that details their education and background as well as net worth and investment experience, and shows that they fully understand the investment process. This questionnaire can be included as part of the Subscription Agreement.

Once you have reached an agreement with investors you should file a notice of your Reg D offering with the SEC no later than 15 days after the sales of the first securities in your offering.

In addition, you should also be aware of “Blue Sky Laws”, which refer to laws in individual U.S. states which exist to prevent the fraudulent sale of securities. These laws can vary from state to state and should be considered in addition to the SEC rules on your Private Placement.

An exemption from Sec Registration does not automatically mean an exemption from a state Blue Sky Law. The kinds of rules in each state might include limits on the number of purchasers allowed, a requirement for a merit review to ensure the offering is fair, limits on the minimum amount of investment required and limitations on the number of offerees within the state.

You should ensure that you thoroughly research the securities laws in the state you intend to offer the Private Placement in – and be aware that you may need to file Blue Sky documentation each year.

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How Mount Bonnell can Help

A Private Placement can be an excellent choice for raising funds for your U.S. market entry. It can be a quicker and more cost-effective way of raising funds than other forms of gaining capital, and help give you the boost you need to expand your business.

However, although it is a less arduous process than other forms of fundraising such as an IPO, it still requires that you ensure you comply with relevant laws and fully understand the process. You must ensure effective documentation is drawn up by experienced professionals who can help you to ensure you comply with SEC exemptions and other regulations, as well as giving you and your investors the protection you need to move forward with confidence.

At Mount Bonnell Advisors, we offer a range of support services to help support you with U.S. fundraising. We work with attorneys and lawyers who are knowledgeable about securities laws and how to create documents such as Private Placement Memorandums. 

If you are interested in learning more about a Private Placement offering or want support and advice on finding investors please get in touch today to find out how we can help you.

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