Investing in a private placement opportunity is done off-exchange, and usually involves a small number of investors who are either institutions or accredited private investors.
There are many possibilities when it comes to the types of private placement investments that can be made, but the nature of the offering is that it is not public, it is made to a small number of institutional level or individual accredited investors (see Regulation D, Rule 505 and 506), and the offering is not registered with the SEC.
Private placement opportunities might include a small closely held corporation offering partial ownership to raise capital, a real estate development requiring outside investors, startups and venture capital investments, or even PIPEs, which are private placements of publicly traded shares at a discount from market value in special circumstances.
PIPE stands for Private Investment in Public Equity, and it allows a company to circumvent the process of making a Secondary Offering to raise capital. There are different types of PIPEs, but in the standard type, the purchasing entity, which may be a mutual fund or other institutional investor, has to register the shares with the SEC soon after the purchase.
A PIPE transaction can possibly go wrong and devalue the rest of the company's common shares, which might trigger the issue of more shares to pick up lost capital, which further devalues the stock. Regulation D is the SEC rule which provides the stipulations for exemption for registration for new issues.
Companies invoking Regulation D must file Form D, which investors can look up in the EDGAR database. The exemptions to registration with the SEC are Rule 504, 505, and 506. While the offering does not have to be registered with the SEC, it does have to remain compliant with these rules.
The idea is that investors experienced and sophisticated enough, and with enough liquid net worth, can handle the risks involved in private placements. Up to 35 non-accredited investors can invest in a private placement under Rule 505 and 506, but this means the company must disclose much more information about itself.
If only accredited investors are involved, the company has discretion about what information about itself it would like to disclose. Offerings made through Reg D exemptions bear some liquidity risk, of course, but they can be resold, after a year, provided the investor adheres to the strict guidelines, which may require the help of a specialized attorney or CPA.
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