Investor Awareness: Private Placements

A private placement is the sale of securities to a limited number of qualified private investors. While an IPO is the initial sale of shares to the general public, a typical private placement is offered only to institutional investors and accredited individuals and entities that meet certain eligibility requirements.

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For companies, private placements can provide an infusion of cash more quickly and less expensively than a public offering. Private placements are also generally not subject to public disclosure obligations. They typically allow companies to have a great deal of control over the process – the company can decide how much to sell, at what price, and to whom. However, those decisions do require a tremendous amount of due diligence and careful deliberation.

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Private placements are exempt from the registration requirements of the federal Securities Act of 1933 and public disclosure requirements as long as certain requirements are met. The sale of securities through private placements cannot involve any public offering, public solicitation, or advertising. In addition, private placements must comply with state laws and anti-fraud provisions of securities laws. Companies must disclose to potential investors all of the pertinent information needed to make a fully informed decision.

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Securities sold through private placement securities can take different forms. Typically, they involve the sale of either debt or equity.

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Investments in private placements carry a high degree of risk for various reasons. Securities sold through private placements are not publicly traded and, therefore, are less liquid. Additionally, investors may receive restricted stock that may be subject to holding period requirements. Companies seeking private placement investments tend to be in earlier stages of development and have not yet been fully tested in the public marketplace.

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Investing in private placements requires high risk tolerance, low liquidity concerns, and long-term commitments. Investors must be able to afford to lose their entire investment.

A company seeking a private placement issues a Private Placement Memorandum or PPM. The PPM details the company’s financial situation and business plan, as well as any other pertinent information about the company and the offering. Once investors decide to invest, they complete a subscription agreement.

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Due diligence begins with a background inquiry on the company and its management and an analysis of all the information presented by the company and its offer. The principal thrust of due diligence focuses on compensation, self-dealing, background of insiders, litigation history or potential, risks and accurate discussion of the nature of the business. An internet search can provide essential information. Do not depend on the accuracy of information supplied by the company or its agent, but engage in an independent investigation that is customized for each offering. Most offerings may have certain unique features that require additional due diligence. Ask for clarification on any information provided that you do not understand and request back up documents to support their claims. Remember that Ponzi schemes pay until they can’t so follow the money and make sure the income is income.

2 thoughts on “Investor Awareness: Private Placements

  1. Hi Beatriz,

    I rehab and flip properties from time to time and have been very successful with each project. I have let many other great opportunities slip away as I did not have the funding or in some cases the speed to capture those opportunities. I could certainly do a lot more projects with more funding. How do I present real estate investment projects for proposed funding to investors looking for opportunities such as this?

    1. IRAs and Retirement accounts are a wonderful source of funding for Real Estate Investments. In fact, IRAs and Retirement accounts are probably the most underutilized source of funds for Real Estate Investments. There is currently over 23 Trillion Dollars in Retirement accounts, and over 7 Trillion dollars in IRAs, yet only about 2% of those funds are invested through Self-Directed IRAs into Real Estate deals.

      Many real estate investors use private funding from IRAs. The way they go about presenting their opportunities to potential investors varies greatly. Networking at local Real Estate Clubs is helpful, as well as attending Quest gatherings such as our weekly Educational classes. You of course want to understand the steps and process of investing through a SDIRA, so that when you network with other people who may have IRA funds available, you can speak about the process efficiently.

      As a side note, the one thing Quest Trust Company is restricted from doing is promoting any types of investment to our clients since we are not licensed securities agents. A self-directed IRA is exactly that, “self-directed”, meaning he or she must identify their own investment opportunities.

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